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 withholding may be required in respect of a payment even if the payment is not included in the recipient's taxable income under subparagraph 115(1)(a)(v)
Position: Yes
Reasons: Application of the provisions of the Act and the Regulations
June 17, 2008
XXXXXXXXXX HEADQUARTERS
Senior Resource Officer
Client Services Division
International Tax Services Office
2008-027672
XXXXXXXXXX
We are writing in response to your April 7, 2008 memorandum in which you requested our views on the withholding requirements under the Income Tax Regulations (the "Regulations") as they apply to certain non-resident employees of the XXXXXXXXXX (the "College").
Background
1. The College is a post-secondary educational institution formed pursuant to the XXXXXXXXXX. The College is a non-profit corporation and is a resident of Canada for purposes of the Income Tax Act (the "Act").
2. Approximately XXXXXXXXXX% of the College's revenue is derived from corporate training programs, applied research and special projects. One of these special projects is the comprehensive agreement (the "Agreement") entered into with XXXXXXXXXX (the "Government") to establish a campus of the College in that country. The Agreement was signed XXXXXXXXXX and expires on XXXXXXXXXX. The College offers programs and courses at the post secondary level, primarily to citizens of XXXXXXXXXX.
3. The College operates the campus in XXXXXXXXXX as a business venture. Fulfillment of the obligations under the Agreement is expected to generate in excess of $XXXXXXXXXX of net revenue for the College over the life of the Agreement.
4. Pursuant to the terms of the Agreement, the College is responsible for hiring all the employees of the College, which include teaching staff, administrative staff, security staff, qualified medical staff and administrative support staff including human resources and information technology, library, finance and admissions/registration/student support staff.
5. Some of the employees of the College ("Employees") are former residents of Canada who will receive remuneration directly from the College in respect of their employment in XXXXXXXXXX. XXXXXXXXXX does not impose any income tax on the Employees and Canada does not have an income tax treaty with the government of XXXXXXXXXX.
6. None of the Employees perform or will perform any duties of employment in Canada.
Issue
In the situation described above, what are the withholding requirements imposed on the College with respect to the Employees?
Subsection 153(1) of the Act requires every person that pays an amount described therein to deduct or withhold from the payment the amount determined in accordance with prescribed rules. The prescribed rules are found in Part I of the Regulations.
Section 101 of the Regulations requires every person that makes a payment described in subsection 153(1) of the Act to deduct or withhold the amount, if any, determined in accordance with the rules prescribed in Part I of the Regulations. Subsection 153(1) includes the payment of salary, wages or other remuneration (other than amounts described in subsection 212(5.1)).
Section 102 of the Regulations sets out the rules for computing the amount to be deducted or withheld by an employer in respect of any payment of periodic remuneration made to an employee. Section 103 of the Regulations establishes the withholding requirements for non-periodic amounts (i.e., bonuses and retroactive increases in remuneration).
Subsection 104(2) of the Regulations sets out certain exceptions to the withholding requirements in sections 102 and 103. It provides that an employer is not required to deduct or withhold from a payment in respect of an employee who was neither employed nor resident in Canada at the time of the payment except in respect of
(a) remuneration described in subparagraph 115(2)(e)(i) of the Act and is paid to a non-resident person who has in the year, or had in any previous year, ceased to be resident in Canada, or
(b) remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person.
For the purpose of determining the amount under paragraph (a), subparagraph 115(2)(e)(i) refers to remuneration paid directly or indirectly to a non-resident person except to the extent that the remuneration
(a) is subject to an income or profits tax by a government other than Canada; or
(b) is paid in connection with the selling of property, the negotiating of contracts or the rendering of services in the ordinary course of a business carried on by the employer, a foreign affiliate of the employer or a person with whom the employer does not deal at arm's length.
The withholding exemption in subsection 104(2) is based on the conditions set out in that subsection. It is not based on whether or not the recipient of the payment is subject to tax in Canada under subparagraph 115(1)(a)(v) of the Act. However, the range of payments that would not be taxable in Canada but that would be subject to withholding appears to be quite narrow (it appears to be limited to situations where the employee is a former resident of Canada who is not subject to tax in the foreign jurisdiction (other than by virtue of a tax treaty) and who is not engaged in the selling of property, the negotiating of contracts or the rendering of services in the ordinary course of a business carried on by the employer).
Where an amount has been deducted or withheld by an employer from a payment to an employee who is not subject to tax in Canada on the payment, the employee may file a return of income for the year pursuant to subsection 150(1) of the Act and claim a refund of any amount deducted or withheld.
Since the payments to the Employees are not subject to tax in XXXXXXXXXX, the College is required to deduct or withhold, in accordance with sections 102 and 103 of the Regulations, from any payments made to its Employees except to the extent that the payments are described in subparagraph 115(2)(e)(i) of the Act. In the situation described above, the College would not be required to deduct or withhold in respect of remuneration paid to such Employees where the remuneration relates to services rendered in the ordinary course of a business carried on by the
College (XXXXXXXXXX). However, the College is required to make an information return in accordance with subsection 200(1) of the Regulations in respect of any payments described in subsection 153(1).
We hope that our comments are of assistance. If you wish to discuss any of the above, please contact the writer.
XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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