1 June 2001 External T.I. 2000-0055775 - NON-RESIDENT PENALTY FAILURE TO FILE

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.

Principal Issues: Consequences of failure to file T2 Schedule 91 if claiming a treaty-based exemption

Position: Penalty imposed pursuant to 162(2.1)

Reasons: Statutory provision

XXXXXXXXXX 							2000-005577

June 1, 2001

Dear XXXXXXXXXX:

Re. Schedule 91 - Claims for Treaty-Based Exemptions

This is in reply to your letter of July 11, 2000 wherein you requested our comments with respect to the imposition in subsection 162(2.1) of the Income Tax Act ("Act") of penalties on a non-resident corporation exempt from Part 1 tax in Canada pursuant provisions of a bilateral income tax convention that Canada has with another country ("tax treaty").

The obligation to file a return of income is imposed upon a non-resident corporation pursuant to paragraph 150(1)(a). First, a non-resident corporation must file a return for a year if, in the year, it carried on business in Canada, had a taxable capital gain or disposed of a taxable Canadian property. Second, a non-resident corporation must file a return for any year for which tax under Part I is payable by the corporation or would be payable but for a tax treaty. The return required "is in a prescribed form" and contains "prescribed information" which in the case of a non-resident corporation includes a T2 Corporation Income Tax Return and Schedule 91. Please note as well that subsection 244(16) of the Act provides that any form purporting to be authorized or prescribed by the Minister is a form authorized by the Minister under the Act unless called into question by the Minister or some person acting for the Minister. The T2 and Schedule 91 are intended to provide the Canada Customs and Revenue Agency with the rationale for the non-resident corporation's treaty exemption claim.

A non-resident corporation which fails to file a return in accordance with paragraph 150(1)(a) of the Act and upon which a penalty may be imposed pursuant to subsections 162(1) and 162(2), will be liable to a penalty computed in accordance with subsection 162(2.1). If the non-resident corporation is not liable for Part 1 tax on the basis of a treaty exemption, the penalty imposed is the greater of $100 and $25 for each day, up to 100, that the failure to file continues. The imposition of this penalty does not deny treaty protection to a U.S. corporation on the basis of non-filing of Schedule 91 by imposing a tax that would not otherwise be payable but merely imposes a civil penalty (which may bear no relationship to the tax which might otherwise be payable) for failure to abide by domestic legislation relating to the administration of the Act and tax treaty. Since your query has been made on behalf of American associates, we would like to draw your attention to the statement in the Technical Explanation of the Convention (Canada-U.S. Income Tax Convention - 1980) with respect to Article II to the effect that since the article does not specifically refer to interest, fines and penalties, Canada may impose interest, fines, and penalties pursuant to its domestic laws.

We trust the above comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch