2001 Ruling 2001-0086683 - Withholding Tax

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: whether payment from Canco to non-resident is subject to withholding tax under subparagraph 212(1)(d)(iii)

Position: no

Reasons: determined that, based on the documentation provided, payments were made on behalf of the customer such that the payments would not be dependent in whole or in part of any of the criteria listed in clauses 212(1)(d)(iii)(A) to (C)

XXXXXXXXXX 2001-008668

XXXXXXXXXX, 2001

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco")

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. is under objection by the taxpayer or a related person;

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

5. is the subject of a ruling previously issued by this Directorate.

Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended.

Facts

1. Canco is a corporation which subsists under the laws of Canada. It is a taxable Canadian corporation as defined in subsection 89(1). It files its annual income tax return at the XXXXXXXXXX Taxation Services Office.

2. XXXXXXXXXX ("Parentco") and XXXXXXXXXX ("Sisterco") are corporations incorporated under the laws of XXXXXXXXXX. Canco and Sisterco are indirect subsidiaries of Parentco.

3. Canco, Sisterco and other affiliated corporations (the "Group") are in the business of XXXXXXXXXX.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. The members of the Group have agreed upon various formulae for allocating gross revenue realized on each joint venture agreement less any applicable third party XXXXXXXXXX costs incurred by a member of the Group among the members of the Group who participated in the XXXXXXXXXX.

9. Sisterco acts as the clearing agent to: (1) collect from each Joint Venturer who has received Gross Revenues on behalf of another Joint Venturer, the Gross Revenues to be paid to such other Joint Venturer, (ii) collect from each Joint Venturer who has not incurred its portion of the Gross Costs of a Joint Venture, that portion of the Gross Costs of the Joint Venture that such Joint Venturer has an obligation to incur, (iii) pay to each Joint Venturer, that portion of the Gross Costs that such Joint Venturer has incurred on behalf of another Joint Venturer, and (iv) pay to each Joint Venturer that portion of the Gross Revenue of any Joint Venture to which such Joint Venturer is entitled.

10. Parentco and Canco entered into a memorandum of agreement dated XXXXXXXXXX, which provided that Parentco and Canco would operate on the basis of a joint venture (the "First Agreement").

11. The participants to the First Agreement agreed to distribute the profit after outlays to third parties but excluding administration, sales and financing expenses realized on each XXXXXXXXXX transaction.

Proposed Transactions

12. Canco proposes to enter into a Joint Venture Agreement (the "JVA") with Sisterco, on its own behalf and on behalf of the other members of the Group to replace the First Agreement.

13. The terms and conditions of the JVA provide, inter alia, that:

(a) Canco and Sisterco, on its own behalf and as agent for members of the Group (other than Canco), shall participate in Joint Ventures providing XXXXXXXXXX services to Clients of the Group;

(b) Canco shall have the exclusive right to perform XXXXXXXXXX services for customers to the extent such services are performed in Canada and the other members of the Group shall have the exclusive right to perform XXXXXXXXXX services for customers to the extent such services are performed outside Canada;

(c) each of Canco and Sisterco, on its own behalf and as agent for members of the Group (other than Canco), shall contribute or otherwise make available such premises, facilities, employees, equipment, furnishings and supplies as are required for the performance of the obligations undertaken arising from a Joint Venture; and

(d) the Joint Venturers to a Joint Venture shall allocate the Gross Revenues of each Joint Venture and incur the Gross Costs of each Joint Venture in accordance with the terms of Article XXXXXXXXXX of the JVA.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. Canco also proposes to revise its credit application form and to use a terms of engagement form when entering into a contract with a customer in order to clarify the responsibilities of the parties to the contract. The credit application form indicates that Canco and/or a Canadian affiliate will invoice the customer. The terms of engagement form includes the following statements:

XXXXXXXXXX.

Purpose of Proposed Transaction

The members of the Group wish to restructure their business agreement in a manner that clarifies that any payment made by Canco to Sisterco pursuant to Article XXXXXXXXXX of the JVA represents an allocation of Gross Revenue earned by the Joint Venture or a payment in respect of Canco's share of the Gross Costs of the Joint Venture which Canco had an obligation to incur and which were incurred by another member of the Group. Canco is of the view that such payments will not be subject to tax under Part XIII. The JVA is intended to reflect the financial and commercial realities of the manner in which the parties to the agreement carry on the business of XXXXXXXXXX. The JVA will clarify the responsibilities of the members of the Group who participate in each joint venture arrangement and allocate the Gross Revenues and Gross Costs of each Joint Venture to the participating members of the Group.

Ruling Provided

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purpose of the proposed transactions, we confirm that a payment made by Canco to Sisterco pursuant to Article XXXXXXXXXX of the JVA as described in paragraph 15 above will not be a payment described in subparagraph 212(1)(d)(iii) and will therefore not be subject to tax under Part XIII.

The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 issued by the Canada Customs and Revenue Agency ("the CCRA") and is binding on the CCRA, provided the proposed transaction described herein is completed by XXXXXXXXXX.

Comment

Nothing in this letter should be construed as implying the CCRA has agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the ruling given above. In particular, this letter should not be construed as implying that the CCRA has considered or is giving an opinion whether the provisions of subsection 247(2) would apply to adjust amounts paid pursuant to the JVA for purposes of the Act.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch