2005 Ruling 2004-0103641R3 - Rental Income - 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.

Principal Issues: Whether the operator of a Website where non-resident owners of vacation homes located in Canada could advertise their properties has to withhold Part XIII tax on behalf of the non-resident owners.

Position: No

Reasons: Subsection 215(3) is not applicable in this case because the vacationers pay the rent directly to the owners; the website operator doesn't receive any payment of rent on behalf of the non-resident owner.

XXXXXXXXXX 							2004-010364

XXXXXXXXXX, 2005

Dear Sir:

Re: XXXXXXXXXX. ("Aco")
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

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

(v) is the subject of a ruling previously considered by the Directorate.

Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts and Proposed Transactions

1. Aco is a XXXXXXXXXX corporation. The operating mind of Aco is XXXXXXXXXX.

2. XXXXXXXXXX

3. Many people ("Owners") own vacation homes ("Properties") in XXXXXXXXXX. The Owners are entitled (subject to local by-laws) to rent the Properties to other persons.

4. Some of the Owners are non-residents of Canada for purposes of the Act.

5. Aco currently owns and operates a website (the "Website").

6. The Website is dedicated to assisting Owners in renting their Properties.

7. Aco (either directly or through a new to-be-incorporated subsidiary corporation) and an Owner will enter into an agreement (the "Agreement") under which Aco will operate the Website and the Owner will use the Website to attract potential guests to his Property (the "Guests"). The Owner will pay a subscription fee to Aco for the right to advertise the Property on the Website. The Agreement is renewable every 12 months.

8. Subject to certain mandatory provisions in the Agreement, all of the terms of the Guests' stay at the Property (the rent, the length of stay, the damage deposit, the method of payment, etc.) are negotiated directly between the Owner and the Guests. Aco is not involved in those negotiations. Aco does not act as a rental manager, contact or agent of the Owner in connection with the operation of the rental activities.

9. The Guests pay a rent for staying in the Property and for the guest services provided by the Owner (the "Rent"). The process for the payment of Rent is as follows:

(a) The Owner has a direct agreement with Visa (the "Merchant Agreement") under which the Owner is a merchant. When a Guest pays with a Visa card over the Website, a link is established with a company acting at arm's length ("Eco") with all the other parties. Eco routes the credit card information to Visa or its assignee (Global) for approval of the credit card transaction. Visa or its assignee issues a confirmation number which Eco transmits to the Guest.

(b) Under the terms of the Merchant Agreement, Visa/Global deposits funds directly into the Owner's bank account. The money is not transmitted through Aco's or Eco's bank accounts.

(c) The Owner's name appears on the credit card statement which Visa sends to the Guest. Any necessary credit card refunds are done by the Owner through his own merchant number.

(d) Aco provides vacation rental software services to the Owner and facilitates the Owner's acquisition of an independent merchant number and facilitates the digital connection between a credit card payment and the Owner's software to record a payment and booking into the Owner's web site.

(e) Eco and Aco charge monthly and annual fees to the Owner for software and payment processing services. The Owner pays Aco and Eco for the services.

10. An Owner is responsible for collecting Rent from his Guests and remitting to the appropriate taxing authority any applicable XXXXXXXXXX hotel or sales taxes. An Owner is also responsible for ensuring that he files a Canadian income tax return where necessary to report income from his rental activities.

Purpose

11. Aco's purpose in entering into the Agreement is to assist an Owner with operating its rental activities by providing marketing, software and consulting services and to require the Owner to operate his rental activities in a strictly regulated manner so as to protect Aco's goodwill associated with its Website.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Ruling is as follows:

We confirm that subsection 215(3) of the Act does not apply to Aco in respect of the Rent and that, therefore, Aco will not have to withhold on behalf of non-resident Owners any tax payable by them under paragraph 212(1)(d) of the Act.

Other comments

It is our view that, depending on the situation of each non-resident Owner, paragraph 212(1)(d) of the Act may be applicable to subject the non-resident Owner to an income tax of 25% (or a reduced rate under the applicable income tax convention) on the Rent.

Where 212(1)(d) is applicable, the Guests must, according to subsection 215(1) of the Act, withhold from the Rent the amount of the tax payable by the non-resident Owners under 212(1)(d) of the Act and remit that amount to the Receiver General on behalf of the non-resident Owners.

If the amount of, or in lieu of, the Rent is paid to an agent (such as a rental manager) or any other person for or on behalf of the non-resident Owner without the tax having been withheld by the Guest, such person shall withhold the amount of the tax and remit that amount to the Receiver General according to subsection 215(3) of the Act.

However, according to section 805 of the Regulations, where it could be established that the Rent payments may reasonably be attributed to a business carried on by the

non-resident Owner through a permanent establishment in Canada, the non-resident Owner would not be taxable under Part XIII of the Act on such amounts. In such case, the rental income would be taxable only under Part I of the Act.

Opinions

The Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the Canada Customs and Revenue Agency with respect to Agreements with non-resident Owners that are entered into before XXXXXXXXXX

Your truly,

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