Regulation 105: I'm a US Contractor Providing Services in Canada

If you are a US-based contractor (sole proprietor, partnership, or corporation) providing services in Canada, the Canadian payer is required to withhold 15% of the gross payment under Regulation 105 of the Income Tax Regulations. The withholding applies regardless of how long you are in Canada and regardless of whether you ultimately owe Canadian tax. It is a compliance mechanism, not a final tax: you can recover the withholding by filing a Canadian non-resident return or, better, avoid it by obtaining a waiver before the services are performed.

When does Regulation 105 apply?

Regulation 105 applies when:

1. A payment is made by a Canadian resident (or a non-resident with a Canadian business)
2. To a non-resident
3. For services rendered in Canada

The key phrase is “services rendered in Canada.” If you perform the services entirely from the US (remote work, no physical presence in Canada), Regulation 105 does not apply because the services were not rendered in Canada. If you travel to Canada to perform the work (consulting engagements, on-site installations, training, conferences), the services are rendered in Canada, and the withholding applies.

The 15% rate: the withholding is 15% of the gross payment (not net of expenses). If the contract is for $100,000 and you travel to Canada for the work, the Canadian payer must withhold $15,000 and remit it to CRA, paying you $85,000. The $15,000 is not your final Canadian tax; it is a deposit against your potential tax liability, recoverable through a waiver or a return filing.

The treaty exemption

Article VII of the Canada-US tax treaty provides that business profits of a US enterprise are taxable in Canada only if the enterprise has a permanent establishment (PE) in Canada. If you do not have a PE in Canada (no fixed place of business, no dependent agent concluding contracts in Canada), your business profits from Canadian services are not taxable in Canada.

Article XV(1) provides a similar exemption for independent personal services performed by an individual: the income is taxable in Canada only if the individual has a “fixed base” in Canada or is present in Canada for 183 days or more in the calendar year.

For most US contractors providing short-term services in Canada (consulting engagements, project-based work, conferences), the treaty exemption applies: no PE, no fixed base, and less than 183 days in Canada. The Canadian payer still must withhold under Regulation 105 (the domestic law obligation exists regardless of the treaty), but the withholding is fully recoverable.

The waiver: Form R105

To avoid the 15% withholding, apply to CRA for a Regulation 105 waiver before the services are performed. The application is made using the R105 waiver form and submitted to the CRA non-resident withholding team.

What the application includes:

• Identification of the non-resident (name, address, US tax ID)
• Description of the services to be performed in Canada
• Contract details (amount, dates, scope)
• Treaty claim (Article VII or XV, with an explanation of why no PE or fixed base exists)
• Confirmation that the non-resident will file a Canadian return if required

Processing time: CRA targets 30 business days for waiver applications. In practice, processing can take longer, especially during peak periods. Apply well in advance of the service dates. If the waiver is not processed before the payment date, the payer must withhold.

If the waiver is granted: CRA issues a letter to the payer authorizing reduced or zero withholding. The payer pays you the full contract amount without withholding.

If the waiver is denied: the payer withholds 15%. You recover the withholding by filing a Canadian non-resident return at year-end.

Filing a Canadian return to recover the withholding

If Regulation 105 withholding was applied and you are exempt from Canadian tax under the treaty, file a Canadian non-resident return (T1 for individuals, T2 for corporations) reporting the Canadian-source service income. Claim the treaty exemption. The return shows zero Canadian tax, and the Regulation 105 withholding is refunded.

Timeline: the return is due June 15 of the following year (for individuals). Processing the refund can take 3-6 months after filing. Combined with the time between withholding and filing, the total cash flow delay is 6-18 months.

Expenses: if you are filing the return (rather than claiming a full treaty exemption), you can deduct expenses incurred in earning the Canadian-source income (travel, accommodation, materials). The Canadian tax on net income at graduated rates is often lower than the 15% gross withholding, and any excess withholding is refunded.

What if I have a permanent establishment?

If your US business has a PE in Canada (an office, a fixed place of business, a dependent agent), the treaty exemption does not apply, and your business profits attributable to the PE are taxable in Canada. You must file a Canadian corporate return (T2) or individual return (T1) reporting the income and paying tax. The Regulation 105 withholding is credited against the tax owing.

A PE can be created inadvertently. If you rent an office or workspace in Canada for an extended project, or if you have an employee or agent in Canada who habitually concludes contracts on your behalf, you may have a PE. The PE analysis should be done before the engagement, not after CRA raises it.

Regulation 105 vs Regulation 102

Regulation 102 is the parallel withholding requirement for employment income: if a non-resident employee performs services in Canada, the Canadian employer (or the non-resident employer with a Canadian PE) must withhold income tax, CPP, and EI. Regulation 102 applies to employees; Regulation 105 applies to contractors.

The distinction matters because CRA may reclassify a contractor as an employee (based on the same factors the IRS uses: control, tools, economic dependence, etc.). If reclassified, Regulation 102 applies instead of 105, and the Canadian payer owes additional amounts (employer CPP, EI, and potentially penalties for failure to withhold).

What should I do next?

If you are a US contractor with a Canadian client engagement that involves services performed in Canada, apply for the R105 waiver before the work starts. If the work has already started and withholding was applied, file a Canadian non-resident return to recover the withholding. If you regularly perform services in Canada, consider whether you have a PE (which changes the analysis entirely).

• Canadian freelancer with US clients: do I need a W-8BEN?, the reverse scenario
• Can my Canadian employer keep me on payroll after I move to the US?, the PE risk from the employer’s side
• Part XIII withholding, the broader Canadian withholding framework

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.