Classic rock, Regulation 105 withholding requirements and other musings

For those of you who know me, you’ll know that I personally live our firm’s branding material… I’m passionate about tax! Outside of work, people who know me also know that my taste in music is wide ranging.  I’m passionate about music in general and have a soft spot for “classic rock”, with one of my favorite bands being AC/DC.  This weekend, I had the pleasure of travelling to Vancouver with my two oldest children to attend their concert.  It was great!  A little loud… but great nonetheless!

So how do the two topics – tax and classic rock – tie together?! Well, while I was attending the AC/DC concert, I could not help but think about income tax.  I know, some of you will think I’m crazy but tax is always at the top of my thoughts.  I got to thinking how much revenue was being generated that night in Vancouver and what the tax implications were for the band.  Obviously I can’t comment on AC/DC’s specific tax situation, but I can tell you that most entertainers, if they are a resident of a country with which Canada has a tax treaty, will be subject to the tax implications as laid out in the applicable treaty.  For example, US resident entertainers who generate revenues in Canada will generally be subject to the provisions of Article XVI of the Canada/US Treaty.  Certain provisions in Article XVI of the Canada/US Treaty enable Canada to tax such concert revenues notwithstanding that the entertainer is not a resident of Canada.

While most of us are not entertainers, this leads to an important topic that many people are simply not aware of.  Regulation 105 of the Canadian Income Tax Act requires people who pay non-residents of Canada a fee, commission or other amount in respect of services rendered in Canada of any nature whatsoever to withhold and remit to the Government 15% of the payment amount that would otherwise be paid to the non-resident.  The withholding requirement under Regulation 105 does not apply to remuneration such as employment earnings but instead will apply to the description previously mentioned.  If the service is rendered by the non-resident in Quebec, a further 9% must be withheld and remitted to Revenu Quebec.

The withholding obligation catches many taxpayers by surprise.  Many non-residents performing services in Canada feel that they have no tax obligation to Canada since the non-resident may not have a “permanent establishment” in Canada.  Generally, non-residents who perform in Canada will not have any tax obligations to Canada if they do not have a permanent establishment in Canada, and thus the non-residents will often argue that there should be no withholding requirement.  However, Regulation 105 was specifically put into place to provide security to Canada to ensure that the non-resident performing services in Canada truly has no obligation to pay tax.  While there can be exemptions from Regulation 105, obtaining such an exemption can be time consuming.

Regulation 105 can be very tricky and in many cases subject to interpretation.  Please be aware of your withholding requirements or, conversely, non-residents should be aware that they may be getting less, initially, then they ultimately thought (the non-resident will be required to file a Canadian income tax return in order to recover the withheld tax).  Please consult Moodys’ LLP Tax professionals for further information on this important topic.  Also refer to CRA Information Circular IC-75-6R2 for a good publication on this topic.