Withholding on a US Business's Work in Canada

When must a Canadian payer withhold from a US business's fees?

A payer generally withholds 15% when paying a non-resident person for services performed in Canada. The rule covers fees, commissions, and other amounts paid to US self-employed people and corporations; it can also apply to the non-resident members' share of a partnership's fee. The payer can be resident inside or outside Canada, and withholding applies even if the US business expects treaty protection or has a Canadian branch (Income Tax Regulations, section 105; CRA circular, paragraphs 5, 7, 21–22).

Employee wages and fees for a non-resident director's Canadian duties follow Regulation 102 and T4 reporting; film or video acting fees follow separate rules (CRA circular, paragraphs 76–78; CRA T4A-NR guide).

The payer deducts from the payment; the CRA normally must receive the remittance by the 15th day of the following month, or the next business day if that date is a weekend or CRA-recognized public holiday. To remit it, the payer needs a CRA payroll program account, even if it has no employees. If the payer's business or activity ends, the CRA must receive it within seven days (CRA T4A-NR guide). An advance for work that will be done in Canada is also subject to withholding when paid. A tax treaty does not, by itself, authorize the payer to stop withholding; the payer needs the CRA's waiver or reduction letter before paying without the usual deduction (CRA circular, paragraphs 12 and 41; CRA T4A-NR guide).

Does withholding cover work done from the US or reimbursed expenses?

Work physically performed in the US is outside Regulation 105, even when the customer is Canadian. For a mixed contract, the payer and provider need a reasonable, documented allocation of the fee to work inside and outside Canada. If they cannot support the split, the CRA recommends withholding on the full service payment (CRA circular, paragraphs 32–34). Keep the contract, invoices, work records, and travel dates together.

The Canadian service fee is a gross amount: ordinary cost reimbursements and payments made on the provider's behalf are generally included. The CRA makes an administrative exception for reasonable transportation, accommodation, and meal expenses paid directly or reimbursed, with vouchers where required. GST/HST charged on the service is also excluded. Report qualifying travel expenses separately on the T4A-NR slip (CRA circular, paragraphs 23–26 and Appendix B; CRA T4A-NR guide, boxes 18 and 20).

Is the amount withheld the final Canadian tax?

No. Regulation 105 withholding is an advance payment against the US provider's possible Canadian income tax. A Canadian return determines the actual liability and any refund; a treaty exemption can reduce the final tax without automatically removing withholding at payment time (CRA circular, paragraphs 50 and 56–57).

How does a US business apply for a waiver, and when?

The US provider applies on Form R105, with the contract, Canadian work dates, payment schedule, and evidence supporting its treaty position or estimated income and expenses. Send it to the CRA at least 30 days before Canadian services begin or the first related payment, whichever comes first. The CRA accepts online and mail submissions and lists the correct office by work location (CRA circular, paragraphs 56–63).

For a treaty request, an individual, authorized corporate officer, or authorized partner signs R105's Section IV declaration. A flow-through partnership or LLC attaches Form NR302 or NR303, respectively. For an income-and-expense request, complete Appendix B. Tell the CRA immediately if the application facts change (CRA: how to complete R105; Form R105, pages 2–4).

A corporation needs a Canadian business number for Form R105; if it cannot get one before applying, it can attach Form RC1 and supporting documents to its application. An individual should obtain a social insurance number or individual tax number before applying to avoid delays (CRA: identification numbers for waiver applications).

The payer should keep the CRA authorization letter and apply only the reduction it allows. A late application can still be considered, but a waiver issued after payments begin covers only later payments. Claim earlier withholding through the return process below. Until the letter arrives, the payer must withhold (CRA circular, paragraphs 50 and 61; CRA T4A-NR guide).

Which waiver fits: treaty-based or income-and-expense?

A treaty-based R105 request fits when the US provider can show treaty entitlement and that the Canadian work will not produce taxable business profits there, usually because it has no Canadian permanent establishment. An income-and-expense request fits when Canadian tax may be payable but withholding on gross fees is more than the estimated tax on net Canadian income. The CRA decides whether to waive or reduce withholding and may require security for an income-and-expense reduction (CRA circular, Appendices A and B).

US formation alone does not prove treaty entitlement. For a partnership or LLC, relief may flow through qualifying US-resident owners if US tax law treats them as earning the Canadian fee directly; check each owner's share and document that treatment for the waiver (Canada–US treaty, Article IV(1) and (6)–(7)). Form R105-S is a separate simplified process for qualifying non-resident artists and athletes, rather than the ordinary business waiver (CRA Form R105-S).

When does work in Canada create a permanent establishment?

A US treaty resident may have a Canadian permanent establishment through a fixed place of business, such as an office, or an agent who habitually concludes contracts there. A construction or installation project lasting more than 12 months can also create one. These rules can apply before the treaty's special services day tests are met (Canada–US treaty, Article V(1)–(5)).

For service work other than a building site or construction or installation project that does not already create a permanent establishment, Article V(9) can deem one under either test. Those projects have the separate more-than-12-month rule above (Canada–US treaty, Article V(3) and (9)):

For the connected-project test, count days services are provided, not each worker's days: a crew working on one day counts as one day. The individual test counts that person's days physically present in Canada, including days without work (US Treasury technical explanation, pages 11–12).

If the US provider qualifies for Article VII and has no Canadian permanent establishment, Canada generally cannot tax its business profits. If it has one, Canada may tax profits attributable to that establishment. Count rolling 12-month periods and review the whole arrangement; 183 days is not a general safe harbor (Canada–US treaty, Articles V and VII).

How does the US provider recover excess withholding?

The non-resident taxpayer claims federal withholding on a Canadian income tax return, using the T4A-NR slip. A corporation files a T2; a self-employed individual or individual partner files a non-resident T1 to recover withholding; a corporate partner files its own T2 as applicable. A treaty-exempt individual with nothing withheld may not need to file unless another filing trigger applies (Income Tax Act, section 150(1.1); CRA: non-resident individuals). If required to file, an individual carrying on business in Canada generally files by June 15 of the following year, but pays any balance by April 30 (CRA T4A-NR guide). If the assessed tax is lower than the withholding, the CRA refunds the excess, subject to amounts the taxpayer otherwise owes (CRA circular, paragraphs 50–53; CRA T4A-NR guide). Keep all slips and proof of the fee allocation.

If Quebec tax was also withheld, get the separate RL-1 slip from the payer. A federal return does not claim that Quebec deduction; check whether a Quebec return is needed to recover it (Revenu Québec: RL-1 guide; Revenu Québec: non-resident tax obligations).

Must a US corporation file even if the treaty exempts its profits?

Yes, if a non-resident corporation carried on business in Canada, it files a T2 even when it claims treaty exemption from Canadian income tax. It attaches Schedule 97 and, if claiming treaty exemption, Schedule 91 (CRA: non-resident corporation filing). The T2 is due within six months after the corporation's tax year ends. A late return can trigger a minimum penalty under section 162(2.1), even where no Part I tax is payable (CRA: who must file a T2; Income Tax Act, section 162; CRA circular, paragraph 50). A waiver does not remove this filing duty.

What happens to employees' pay for Canadian workdays?

Employee wages for duties performed in Canada follow Regulation 102 payroll withholding, not Regulation 105 service-fee withholding. A US employer can have Canadian payroll duties even when its own customer payments have an R105 waiver. A qualifying non-resident employer can apply for certification on Form RC473 for qualifying treaty-exempt employees; other employees may need an individual Regulation 102 waiver (CRA circular, Part II and paragraph 43; CRA: non-resident employer certification). See Running Canadian payroll for the payroll steps and Working across the border for the employee's personal tax position.

Does Quebec withhold separately?

Yes. A payer for services performed in Quebec by a person not resident in Canada generally withholds a separate 9% Quebec income tax amount, subject to Quebec's exceptions. The federal R105 waiver does not itself authorize a Quebec reduction (Revenu Québec: payments for services in Quebec).

For a Quebec reduction, a self-employed person or partnership uses Form TP-1016-V; a non-resident corporation or LLC uses Form CO-1016. The CO-1016-T is only a courtesy translation. Revenu Québec generally asks for the service contract and residency and travel evidence, and recommends applying 30 days before work or first payment (Revenu Québec: reduction in source deductions; Revenu Québec: application forms; Revenu Québec: corporation application).

What must the payer report, and what if it misses withholding?

The payer files a T4A-NR information return and gives the US provider a T4A-NR slip by the last day of February after the calendar year of payment, even if the CRA approved a waiver. If that date falls on a weekend, the return is due the next business day. The slip separates gross Canadian service income, qualifying travel expenses, and tax withheld (CRA circular, paragraph 42; CRA T4A-NR guide).

If the payer fails to deduct or remit required withholding, the CRA can hold it liable for the missing amount, interest, and penalties. Late or missing T4A-NR slips can bring separate penalties. A waiver on the customer's payment also leaves the US provider's own duties on payments to employees and non-resident subcontractors intact (CRA circular, paragraphs 41–44; CRA T4A-NR guide: penalties).

Example

Illustrative amounts in Canadian dollars. A US corporation agrees to a C$100,000 service contract. All Canadian work is outside Quebec. Its signed work schedule and time records support C$40,000 of work physically done in Canada and C$60,000 done in the US. The corporation has no CRA waiver when the customer pays. The customer withholds 15% of C$40,000, or C$6,000, and pays C$94,000 to the corporation. It remits C$6,000 to the CRA and reports the Canadian service payment on a T4A-NR slip.

If the corporation is entitled to treaty benefits and has no Canadian permanent establishment, it still files a T2 if it carried on business in Canada. It claims the C$6,000 withheld; the CRA determines the refund after assessing the return. The contract, work records, and T4A-NR slip support the claim.

Different for you?

• You perform work in Quebec: budget for the separate provincial withholding and reduction request; cross-border tax covers the two applications together.
• Your US business uses an LLC, a partnership, or a long Canadian project: treaty entitlement, permanent establishment, and filing depend on the entity and work facts; see Expanding a US business into Canada or get cross-border tax help.
• Your employees travel to Canada: review their personal cross-border tax and your Canadian payroll duties.
• You also need to charge Canadian sales tax: see GST/HST for non-resident sellers.
• You need to account for Canadian tax on a US return: see Foreign income on a US return.
• Payments or returns were missed: gather contracts, work and travel dates, invoices, waiver letters, remittance records, and T4A-NR slips for a cross-border tax review.