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Canadian companies using independent contractors in the US
Expert: Philippe Brideau
In the USA when a company uses an independent contractor (an individual) for a service we issue a form 1099 to them at the end of the year so the gov't knows how much they earned. This amount must be included an their individual tax return. Does Canada have a similar requirement? If so, would you be obligated to issue something to individual contractors residing in the U.S.? How does a Canadian company support payments to non-employees for tax reporting?
Philippe Brideau answered:
Does Canada require organizations to file a form at year-end, similar to form 1099 used in the US, reporting how much money an independent contractor earned that year?
Yes, for non-residents, the payment is reported on a T4A-NR slip.
When a Canadian company hires an independent contractor in the US, does this fall under the tax jurisdiction of Canada?
First we must establish where the service is rendered.
Service rendered in Canada
1) If the service is rendered in Canada then Regulation 105 (Reg 105) is applicable. Reg 105 imposes a 15% withholding tax on fees, commissions or other amounts paid to a non-resident for services performed in Canada. Relief from Reg 105 is available if certain criteria are met (Waiver program in the Non-Resident Audit Section of the Tax Services Office). Reg 105 may be recoverable by the non-resident contractor if they file a Canadian tax return and indicate the facts and circumstances alleviating them from Canadian Tax, such as a tax treaty exemption.
2) If the contractor rendering the service is not entitled to relief of Reg 105, then the facts and circumstances of the contractor rendering the service need to be addressed. If the service is rendered through a permanent establishment in Canada, then in accordance with the provisions of the Canada-US Tax Convention, Canada has the right to tax the income earned by the US contractor.
Service performed in the US
If the service is rendered in the US, then the Canada-US Tax Convention would alleviate any right of Canada to tax the income earned by the US contractor and there would be no requirement for Reg 105 withholding.
How does a Canadian company need to support payments made to contractors for tax reporting?
As a general rule, the Canada Revenue Agency (CRA) does not specify the books and records to be kept by taxpayers. Books and records must permit taxes collected, remitted or payable and any credits claimed, to be determined, and be supported by source documents that verify the information contained within. An appropriate source document to support a payment made to a contractor could be a sufficiently detailed invoice or contract from the contractor, along with proof of payment or liability.
The CRA also requires construction businesses to record and report payments they make to subcontractors for construction services. Information on these specific reporting requirements may be found on the CRA Web site at the following links.
If you have specific tax questions, you are encouraged to call one of Canada Revenue Agency's toll free lines, which are listed on their website.
About the author
Philippe Brideau is a spokesperson for the Canada Revenue Agency.