13 February 2006 External T.I. 2005-0126271E5 - Taxation of non-residents

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Is an organization residing in France taxable in Canada in a particular situation?

2. Are consultant fees paid to non-resident consultants (that are not employees) by an organization residing in France taxable in Canada?

3. Is employment income received by the staff of the organization residing in France for the services provided in Canada taxable in Canada?

Position: 1. In the particular situation, no.

2. It depends on the Tax Convention between Canada and the country of residence of the consultants. If the country is France, it would appear that in the particular situation, the consultant fees would not be taxable in Canada. However, except where a waiver of withholding is issued, the payer would have to withhold 15% of the amount paid pursuant to section 105 of the Regulations. If the non-resident is not taxable in Canada because of the Tax Convention, he will obtain a refund of the tax withheld when he produces a Canadian tax return.

3. If the employee is a resident of France, it will depend on whether paragraph 2 of article XV of the Tax Convention applies. If it applies, the employment income will be taxed only in France. However, except where a waiver of withholding is obtained, the withholding and remitting will be the same as for a resident employee. If the non-resident is not taxable in Canada because of the Tax Convention, he will obtain a refund of the income tax withheld when he produces a Canadian tax return.

Reasons: 1. There is no permanent establishment in Canada. Article VII of the Tax Convention between Canada and France provides that the profits of an enterprise of France shall be taxable only in France unless the enterprise carries on business in Canada through a permanent establishment situated in Canada.

2. If the consultant is resident in France, article XIV of the Tax Convention between Canada and France provides that income derived by a resident of France in respect of professional services or other independant activities of a similar character shall be taxable only in France unless he has a fixed base regularly available to him in Canada for the purpose of performing his activities. In the particular situation, the consultants did not have a fixed base regularly available to them. Section 105 of the Income Tax Regulations.

3. Paragraph 2 of article XV of the Tax Convention between Canada and France provides that if the conditions of that paragraph are met, the remuneration derived by a resident of France in respect of an employment exercised in Canada shall be taxable only in France. Paragraph 153(1)(a) of the Income Tax Act and section 102 of the Income Tax Regulations.

XXXXXXXXXX 								2005-012627
									Sylvie Labarre, CA
February 13, 2006

Dear Madam:

Re: XXXXXXXXXX

This is in reply to the email of March 11, 2005 sent to Marjorie Stevens and to TCUPacific and that was transferred to our Directorate concerning the XXXXXXXXXX

Facts

XXXXXXXXXX

Questions

1.1 Are XXXXXXXXXX subject to any Canadian tax on revenues?

1.2 Is XXXXXXXXXX required to establish and to declare any accounts in relation to its XXXXXXXXXX activity in Canada, even in the case that its revenues would not be taxed?

1.4 Would XXXXXXXXXX, as an overseas non-for-profit organization be authorized to issue tax-deductible receipts for donations made to XXXXXXXXXX by Canadian individuals or organizations in conjunction with the XXXXXXXXXX? If the answer is no, would it be advisable that XXXXXXXXXX sets up a local legal entity e.g. a company? Would it then be possible for donations within Canada to that entity to be tax deductible to the donor?

1.5 XXXXXXXXXX. Will consultant fees be subject to payment of Canadian taxes by XXXXXXXXXX?

2.1 Are there any income tax implications for XXXXXXXXXX staff and volunteers coming to Canada to work on the XXXXXXXXXX?

Our comments

1.1 Canadian taxation of XXXXXXXXXX

XXXXXXXXXX is a non-resident of Canada. Except as otherwise provided in a Tax Convention, a non-resident person who has carried on a business in Canada at any time in a taxation year may be taxed in Canada pursuant to subsection 2(3) of the Income Tax Act (the "Act") and section 115 of the Act. However, article VII of the Tax Convention between Canada and France (hereinafter "the Tax Convention") provides that the profits of an enterprise of France shall be taxable only in France unless the enterprise carries on business in Canada through a permanent establishment situated in Canada. Article V of the Tax Convention which provides a definition of "permanent establishment" states that for the purposes of the Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. As indicated in the 2005 OECD Commentary, the definition of permanent establishment contains the following conditions:

- the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment;

- this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence;

- the carrying on of the business of the enterprise through this fixed place of business.

We understand from your email that, even if the premises of XXXXXXXXXX were considered a "place of business", it would not be a fixed place of business because of the temporary nature of the XXXXXXXXXX. Therefore, XXXXXXXXXX would not have had a permanent establishment in Canada when it carries on a business in Canada and the business profits would not be taxable in Canada.

1.2 Return

XXXXXXXXXX will have to report the income from business carried on in Canada on a tax return pursuant to section 150 of the Act but it will be entitled to a deduction from the net income under subparagraph 110(1)(f)(i) of the Act for the same amount resulting in no taxable income.

1.4 Donations/Sponsorship

A donation to XXXXXXXXXX by a Canadian taxpayer could not be considered as a charitable gift because XXXXXXXXXX cannot be a registered charity (it is not resident in Canada), XXXXXXXXXX and XXXXXXXXXX is not a charitable organization outside Canada to which her Majesty in right of Canada has made a gift during the individual's taxation year or the twelve months immediately preceding the taxation year. We cannot give you an answer to the question regarding the advisability of incorporating a local legal entity. Many conditions have to be met to be a registered charity as defined in subsection 248(1) of the Act and described in section 149.1. We do not know if that local legal entity would meet them.

XXXXXXXXXX

Sponsorship expenses paid by a Canadian taxpayer who carries on a business will be deductible only if the expense was made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property. This test is satisfied where a sponsorship expense incurred by a taxpayer is expected to improve or maintain its income from his business. Pursuant to section 67 of the Act, no deduction will be made in respect of an expense except to the extent that the expense is reasonable in the circumstances. There is no formality and special procedure regarding the issuance of a receipt for a sponsorship expense deductible from business income.

We would need more information on the outlay paid to XXXXXXXXXX by a taxpayer to determine whether the outlay would otherwise be considered as a deductible expense.

1.5 Taxation of consultant fees

If the non-resident consultant is not an employee of XXXXXXXXXX and carries on a business in Canada, he may be taxed in Canada pursuant to subsection 2(3) of the Act and section 115 of the Act as in the case of XXXXXXXXXX. However, article XIV of the Tax Convention provides that income derived by a resident of France in respect of professional services or other independent activities of a similar character shall be taxable only in France unless he has a fixed base regularly available to him in Canada for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in Canada but only so much of it as is attributable to that fixed base. According to the Tax Convention, the term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

The notion of a "fixed base" is similar to the notion of "fixed place of business" and to be a "fixed base" it must be established at a distinct place with a certain degree of permanence. The consultants will be in Canada for periods ranging between XXXXXXXXXX. In our view, the consultants would not have a fixed base in Canada because of the temporary nature of their duties in Canada.

For non-resident consultants who reside in a country other than France, we would have to examine the Tax Convention between Canada and that country to determine whether or not the consultant fees are taxable in Canada.

However, except where a waiver has been issued, section 105 of the Income Tax Regulations (the "Regulations") states that every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment. As noted in subsection 105(2) of the Regulations, this withholding obligation does not apply in respect of remuneration of an office or employment, described in subsection 100(1) of the Regulations.

Services performed by a non-resident pursuant to contractual obligations may be rendered both inside and outside of Canada. Payments, or a portion thereof, for services performed outside of Canada are not subject to withholding under section 105 of the Regulations. In such cases, a reasonable allocation of the payment will be required to determine the portion that will be subject to the withholding under section 105 of the Regulations. The portions allocated to the services to be performed inside and outside Canada must be clearly expressed either within the contract or through the related information and documents. It is the responsibility of the non-resident and the payer to determine the proper value of these amounts.

Amounts withheld from payments to a non-resident must be remitted to the Receiver General by the 15th of the month following the month in which the payment is made to the non-resident.

The withholding under section 105 of the Regulations does not represent a final tax of the non-resident. Rather, it is a payment on account of the non-resident's potential Part I tax liability to Canada. The ultimate tax liability is determined after the assessment of the non-resident's Canadian income tax return. Non-residents are normally required to file a Canadian income tax return to calculate their tax liability and to obtain their refund, if any. The granting of a waiver or reduction of withholding on amounts subject to section 105 of the Regulations does not affect the requirement of the non-resident providing services in Canada to file a Canadian income tax return. If the consultant fees are not taxable in Canada because of a Tax Convention, the non-resident consultant will obtain the refund of the amounts withheld.

Whether or not a waiver or reduction of withholding was issued to a non-resident, a T4A-NR Information Return (T4A-NR Slips and Summary Form), reporting all amounts paid to non-resident for services provided in Canada (other than employment services) must be filed with the CRA by the last day of February in the year following the year in which the amounts were paid. A copy of the T4A-NR information slip must also be issued to each non-resident.

2.1 Taxation of employees of XXXXXXXXXX

Except as otherwise provided by a Tax Convention, a non-resident person who was employed in Canada at any time in a taxation year may be taxed in Canada pursuant to subsection 2(3) of the Act and section 115 of the Act. However, paragraph 2 of article XV of the Tax Convention provides that remuneration derived by a resident of France in respect of an employment exercised in Canada shall be taxable only in France if:

(a) the recipient is present in Canada for a period or periods not exceeding in the aggregate 183 days in any twelve-month period; and

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of Canada; and

(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Canada.

Even if a Tax Convention provides that the remuneration will be taxable only in France, pursuant to paragraph 153(1)(a) of the Act and section 102 of the Regulations, remuneration paid to non-resident employees who provide services in Canada is subject to the same withholding, remitting, and reporting obligations as those for Canadian resident employees. Any person paying another person salary, wages, commissions, bonuses or other remuneration in respect of an office or employment in Canada must deduct or withhold, remit, and report these amounts to the Canada Revenue Agency (CRA). These obligations extend to non-residents of Canada employing either resident or non-resident employees for services performed in Canada.

Employers are required to withhold and remit withholding tax, Canada Pension Plan contributions, and Employment Insurance Premiums for each of their employees unless a waiver of withholding tax has been issued and/or an exemption provided for CPP based on a Reciprocal Agreement on Social Security that Canada has with the employee's home country.

Employers are required to prepare and file a T4 Information Return (T4 slips and Summary Form), reporting all amounts paid to their employees whether or not a waiver of withholding was received from the CRA. The T4 Information Return must be filed with the CRA by the last day of February in the year following the year in which the payments were made. Employees, both resident and non-resident, must be provided with a copy of their T4 information slips by the last day of February.

The withholding under section 102 of the Regulations does not represent a final tax of the non-resident. Rather, it is a payment on account of the non-resident's Part I tax liability to Canada. The ultimate tax liability will be determined after the assessment of the non-resident's Canadian income tax return (in the case of individuals earning employment income in Canada, a T1 Individual Income Tax Return must be filed by April 30th of the following calendar year). Non-resident employees are normally required to file a Canadian income tax return to calculate their tax liability and to obtain their refund, if any. If, pursuant to the Tax Convention, no Canadian tax is payable on the remuneration, the non-resident employee will obtain a refund for the taxes withheld. The granting of a waiver of withholding on amounts subject to section 102 of the Regulations does not affect the requirement of the non-resident providing services in Canada to file a Canadian income tax return. You will find more information on Non-residents providing services in Canada and the withholding, remitting and reporting obligations in Information Circular IC 75-6R2.

We trust the above has been of some assistance and we regret the delay in responding.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch