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: Whether withholdings are required under Reg 105 on payments for services to a partnership formed in India with non-resident membership?
Position: Possibly.
Reasons: Question of fact. General comments provided.
XXXXXXXXXX
2012-046667
R. Demeter
(613) 948-5274
Attention: XXXXXXXXXX
February 5, 2014
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Non-resident source withholdings
We are writing in response to your request for a technical interpretation which was sent by facsimile transmission dated September 14, 2012, and which was received by our Directorate on October 19, 2012. In your correspondence, you described a situation in which a partnership ("Partnership") was formed under the laws of the Government of the Republic of India. Although unclear from the information provided, it appears that the members of the Partnership are not resident in Canada for purposes of the Income Tax Act. The Partnership has been contracted by a Canadian-resident corporation ("Canco") to provide online technical support services to Canco's customers that are located in Canada and the United States.
As compensation for the services to be rendered by the Partnership, Canco will pay a fee to the Partnership based on a percentage of the total technical support fee revenues to be collected by Canco from its customers. In this regard, you have asked for assistance with the determination of whether the non-resident members of the partnership may be considered to carry on business in Canada, and whether they may be rendering services in Canada through the partnership. You have also asked whether Canco would be required to withhold and remit Canadian tax from its payments to the Partnership in respect of the online technical support services rendered by the Partnership.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
In a situation such as you have described, it remains a question of fact whether a particular non-resident would be considered to be "carrying on business in Canada", and similarly whether the activities of the business would constitute the "sale of goods" or the "provision of services" in Canada. Such questions can only be answered based on a thorough review of all relevant information in any particular circumstance.
For your purposes, it may be helpful for you to note that the Canada Revenue Agency has stated at paragraph 1.53 of the Income Tax Folio S5-F2-C1, Foreign tax credits and deductions, that the determination of the place where a particular business (or a part of the business) is carried on is generally the place where the operations in substance, or profit generating activities, take place. For instance, in the case of a service business, the business would generally be considered to be carried on at the place where the services are performed. (endnote 1)
As an additional point, we note that you have asked whether amounts should be deducted and withheld from payments made to the Partnership for the services it renders to Canco and its customers, pursuant to paragraph 153(1)(g) of the Act and section 105 of the Income Tax Regulations. General information on withholding obligations under these provisions is available in our Information Circular IC 75-6R2, Required Withholding From Amounts Paid To Non-Residents Providing Services In Canada. (endnote 2)
Finally, once the above-noted determinations have been made, you may find it practical to consider the application of the Income Tax Agreement between Canada and India, as the Canadian tax implications to the members of the Partnership, as well as the payments from Canco to the Partnership, may be directly impacted. (endnote 3)
We trust that our comments will be of assistance.
Yours truly,
Robert Demeter, CPA, CGA
Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 Income Tax Folio S5-F2-C1, Foreign tax credits and deductions at paragraph 1.53, available at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html
2 Available at http://www.cra-arc.gc.ca/E/pub/tp/ic75-6r2/ic75-6r2-e.pdf
3 A copy of this Agreement is available at http://www.treaty-accord.gc.ca/text-texte.aspx?lang=eng&id=102409
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