At a Glance
If you send employees to Canada to perform a service, you might run into two different Canadian tax regulations that sound confusingly similar: Regulation 105 and Regulation 102.
They are not the same. In fact, if you manage them poorly, the CRA might take money from your company's invoice and your employees' paychecks.
Regulation 105: The "Company" Tax
Who pays it: The Canadian Client.
Who it affects: Your Company (the vendor).
What it is: A 15% withholding on the gross fee mandated by your invoice. It is an advance on your company's potential corporate income tax.
Regulation 102: The "Payroll" Tax
Who pays it: You (the employer).
Who it affects: Your Employees (the workers).
What it is: Even if you are a US company paying US employees from a US bank account, if those employees are physically working on Canadian soil, Canada considers that "Canadian Source Employment Income."
Technically, you are supposed to withhold Canadian income tax from their paychecks for the days they work in Canada and remit it to the CRA. This is Regulation 102.
Claim Your 15% Withholding Tax Refund
Did a Canadian client withhold 15% of your invoice? We help US companies get that money back fast.
The "Double Whammy" Scenario
Imagine you send a consultant to Toronto for a month.
- Reg 105: Your client withholds 15% of your $50,000 invoice ($7,500).
- Reg 102: The CRA expects you to withhold Canadian tax from your consultant's salary for that month, even though they are already taxed in the US.
This creates a massive cash flow and administrative burden.
Do I Need to Set Up Canadian Payroll?
Strictly speaking, yes, unless you apply for a Regulation 102 Waiver or your employees fall under specific "Non-Resident Employer Certification" exceptions. Many small US companies miss this requirement and risk penalties for failing to withhold operational payroll taxes.
How to Manage Both
- The Company: File a T2 return to recover the Reg 105 withholding.
- The Employees: File a T1 Personal return to recover Reg 102 withholding (if any was remitted), or—better yet—get a Reg 102 waiver beforehand so you don't have to withhold it at all.
Frequently Asked Questions
Does the 15% Reg 105 cover the payroll tax?
No. They are completely separate accounts.
My employees are only there for 2 weeks. Does Reg 102 apply?
Technically yes, but there are "Non-Resident Employer" certification exceptions that can simplify this for short-term stays.
Can my employees get the Reg 102 tax back?
Yes, by filing a Canadian personal tax return (T1). They can usually claim a foreign tax credit in the US for any Canadian tax paid.
What forms do I file for my employees?
You likely need to issue them a T4 slip (Statement of Remuneration Paid) for their Canadian work days.
Is this advice for sole proprietors?
Sole proprietors are unique because they are both the business and the individual. Usually, only Reg 105 applies to them directly unless they have staff.
Seb Prost, CPACPA, Ex-CRA
Seb is the founder of LedgerLogic and a CPA dedicated to simplifying finances for Canadian entrepreneurs. He specializes in setting up automated accounting stacks for e-commerce and agency owners.
