16 September 2009 External T.I. 2009-0331791E5 - Payments to Non-residents

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 amounts paid to a non-resident person could be considered to be for services rendered in Canada, such that subsection 105(1) of the Regulations would apply

Position: General comments provided

									2009-033179
XXXXXXXXXX 								A. Seidel
(613) 957-2058
September 16, 2009 

Dear XXXXXXXXXX :

Re: Section 105 of the Regulations

This is in reply to your February 19, 2009 letter wherein you requested our views as to whether subsection 105(1) of the Income Tax Regulations (the "Regulations") would apply in the circumstances described below.

You describe a hypothetical situation where a corporation resident in Canada ("Canco") develops and deploys marketing programs designed to sell products to customers in Canada. A non-resident corporation ("Foreignco") supplies the products being sold and provides Canco with monthly reports of information compiled from databases maintained in the foreign country. Among other things, Canco pays Foreignco a fixed monthly amount for the monthly reports. In addition, Canco pays Foreignco a percentage of the net profits from its operations on a monthly basis.

Our Comments

It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on any specific situation, we are prepared to provide the following general comments with respect to the hypothetical situation described above.

Paragraph 153(1)(g) of the Income Tax Act (the "Act") specifically provides that "every person paying at any time in a taxation year ... fees, commissions or other amounts for services ... shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall ... remit that amount ...". The "prescribed rules" for payments to a non-resident person are found in subsection 105(1) of the Regulations. Subsection 105(1) of the Regulations applies whenever a person pays a non-resident person a "fee, commission or other amount in respect of services rendered in Canada, of any nature whatever". Where subsection 105(1) applies, that person must withhold and remit to the Receiver General for Canada 15% of the fee, commission or other amount paid to the non-resident person.

Whether a payment by Canco to Foreignco in the hypothetical fact situation described above is a fee, commission or other amount for services rendered in Canada is a question of fact that can only be determined after an analysis of all of the facts and circumstances, including the agreements entered into between Canco and Foreignco, and an analysis of all of the activities performed by Foreignco.

In general, an amount paid by a Canadian resident to a non-resident to acquire a product that will be sold by the Canadian resident in the course of carrying on its business, would not be considered to be the payment of a fee, commission or other amount in respect of services rendered in Canada. Whether or not payments for the provision of other services, including the delivery of product to Canadian resident customers, database monitoring and the provision of monthly reports, would be the type of payment to which subsection 105(1) of the Regulations would apply depends upon whether such services can be considered to be performed in Canada.

The CRA has provided some general comments regarding the types of activities and payments to which subsection 105(1) of the Regulations may apply in paragraphs 10 through 20 of Information Circular 75-6R2 "Required Withholding From Amounts Paid To Non-Residents Providing Services In Canada" ("IC 75-6R2"). IC 75-6R2 also provides some examples of payments that are not subject to subsection 105(1) withholding in paragraphs 23 through 26. We would also refer you to the comments in paragraph 7 of IC 75-6R2 regarding the application of subsection 105(1) of the Regulations to payments made to non-residents who provide their services in Canada as a participant in a joint venture or as a member of a partnership.

We would also draw your attention to paragraph 212(1)(d) of the Act which imposes a 25% tax on certain payments made to non-resident persons as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or similar payment. Whether a payment or any portion of a payment made by Canco to Foreignco in the hypothetical fact situation described above is a rent, royalty or similar amount is a question of fact that can only be determined after an analysis of all of the relevant facts and circumstances, including all of the relevant agreements. In this respect, we would refer you to Interpretation Bulletin IT-303, "Know-How and Similar Payments to Non-Residents", which is available on the CRA website.

We trust our comments are of assistance.

Yours truly,

Daryl Boychuk
Manager, International Tax Section I
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch