18 December 1984 Income Tax Severed Letter A-0486

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.

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

Dear XXX

Re: Non-Resident withholding and taxes

This is in reply to your letter of September 15, 1984 requesting clarification of certain non-resident withholding tax matters.

The point order of your letter has been followed below.

1. (a) We confirm your view that Regulation 105 of the Income Tax Regulations imposes a 15% withholding in respect of payments made to a non-resident person that are fees, commissions or other amounts in respect of services rendered in Canada, of any nature whatever (except for payments described in the definition of remuneration in Regulation 100(1)). It is not a definitive tax but a payment on account of a possible liability for income tax.
• (b) The Canada-U.S. Tax Convention (1980), where applicable, does modify the position outlined in 1 above. Specifically, Article XVII thereof reduces the rate of withholding to 10% with respect to the first $5,000 of remuneration paid to an individual who is a resident of the U. S. in respect of the performance of independent personal services in Canada. Information Circular 75-6 will be revised accordingly.
• (c) regulation 105 refers to payments to non-resident persons (which includes non-resident corporations). Pursuant to subsection 153(1) of the Income Tax Act, a person paying amounts for services must withhold a prescribed amount form the payment and remit it to the Receiver General. Regulation 105 prescribes this withholding with respect to payments to non-resident persons (which includes non-resident corporations). Articles XIV and XVII of the 1980 Convention are restricted to payments to an "individual" for "independent personal services". "Independent personal services" generally refers to services rendered to an individual, who is not an employee, who renders services personally (e.g. a self-employed accountant or lawyer or a professional driver). Thus, Information Circular 75-6 does not require amendment with respect to the provisions referred to in (b) above in respect of payments to non-resident corporations for services rendered in Canada.
2. (a) Where a non-resident contractor charges the Canadian customer a certain amount for services to be rendered in Canada plus an amount to compensate for the travel expenses of the contractor's employees, in our view, the payment in respect of the travel expenses would form part of the amount subject to withholding under Regulation 105.
• (b) we confirm your understanding that the relieving provisions of Article XVII of the Convention are only applicable to individual who are resident in the U. S. or in Canada, as the case may be. In this context, see Article IV of the Convention.
• (c) A U. S. resident consulting firm that has employees who are providing services in Canada, whether a proprietorship, partnership or corporation, would normally not be subject to the provisions of Articles XIV and XVII of the 1980 Convention.
• (d) We confirm your understanding that a resident of Canada must withhold 15% in respect of payments made to a U. S. resident vendor for periodic maintenance of equipment in Canada, notwithstanding that the non-resident employs a Canadian resident to perform the services on his behalf.
• 3. Regulation 105 requires a withholding on amounts paid to non-residents in respect of services rendered in Canada, irrespective of the number of days the non-resident spends in Canada. Of course, if a non-resident individual sojourns in Canada for 183 days or more in the year, that person would be deemed to be resident in Canada for purposes of the act, by virtue of section 250 of the Act. This would require the filing of an Income Tax Return and where the taxpayer is an employee, his employer would be required to withhold from his earnings under subsection 153(1) of the Act.

4 Section 212 of the Act imposes a definitive tax. We confirm that the provisions of an applicable tax convention must therefore be taken into account when determining how much tax is to be withheld in a particular case. In the event of any inconsistency between provisions of the Act and an international tax convention, the provisions of the convention will normally prevail.

• 5. Where the provisions of paragraph 212(1)(d) require a non-resident to pay an income tax on an amount of rent that a person resident in Canada pays or credits to the non-resident, subsection 215(1) requires the payor to withhold the amount of that income tax and remit it to the Receiver General on behalf of the non-resident.
• 6. The term "royalties" in Article XII of the Convention includes payments of any kind received as a consideration for the use of, or the right to use any patent, trade mark, design or model, plan or secret formula or process, which would include payments for the uses of or the right to use computer software. The words "of any kind" would include a lump sum payment ( as well as periodic, monthly or annual payments).
• 7. Information Circular 76-12R2 is presently being revised. Copies of the circular will continue to be available from District Offices as long as the supply lasts.
• 8. Audit programs of the Department are the responsibility of the Policy and Systems Branch. You may wish to write to that Branch of the Department expressing your concern about compliance with the provisions of Part XIII of the Act and Regulation 105.