A Canadian income tax provision is hampering Canadian businesses and prompting U.S. companies to reconsider business opportunities in Canada. Sound familiar? For years, Section 116 of the Income Tax Act1 ("ITA") was a major deterrent to U.S. private equity and venture capital investors looking to acquire Canadian targets. Section 116 stipulated that a non-resident had to obtain a Section 116 certificate from the Canada Revenue Agency ("CRA") when disposing of certain taxable Canadian property. This requirement was especially arduous for limited partnerships given that a Section 116 certificate was required from each partner. To this end, a single partnership could require hundreds of certificates. In its March 2010 budget, following calls for reform, the Canadian federal government amended the definition of "taxable Canadian property", thus removing the red flag from otherwise intriguing Canadian targets. Following the Section 116 amendments, subsection 105 of the Income Tax Regulations2 ("Regulation 105") finds itself at the forefront of income tax provisions in need of amendment. This article will examine the scope of Regulation 105, its onerous characteristics and an alternative approach to the current system it imposes.
Regulation 105 – General Requirements
"Every person paying to a non-resident a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent3 of such payment." – Regulation 1054
Regulation 105 imposes a withholding tax on non-residents for services rendered in Canada.5 The tax withheld is not a final tax to the non-resident taxpayer. Rather, it is a form of deposit or forced prepayment. It ensures that the non-resident receiving payment for rendering services in Canada fulfills its Canadian income tax obligations. The non-resident's tax liability is only determined following the filing of its income tax return. All or part of the amount withheld may be refunded to the non-resident. Non-residents may reclaim the amounts withheld by applying for a waiver or refund. A refund may be appropriate if the non-resident was not required to pay taxes in Canada, or if its tax liability was less than the withheld amount. The non-resident may also be exempt from paying withholding taxes pursuant to a tax treaty between Canada and its resident country.
Scope of Regulation 105
Subsection 105(2) lists the exempt forms of payments, which...