14 July 2011 Ministerial Correspondence 2010-0386191M4 - Canadian withholding taxes

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: Withholding and remittance requirements for certain payments made by a Canadian resident to a non-resident

Position: General comments provided

July 14, 2011

XXXXXXXXXX

Dear XXXXXXXXXX :

I am writing in response to your correspondence addressed to my predecessor, the Honourable Keith Ashfield, in which you asked various questions concerning the taxation of services rendered to Canadians by non-residents of Canada over the Internet and the withholding requirements for payments made to non-residents. Please accept my apology for the delay in replying.

I assure you that the Canada Revenue Agency (CRA) is committed to applying the tax legislation consistently and fairly. In this regard, the CRA has a mandate to treat all taxpayers equally, and it regularly conducts audits to ensure that taxpayers are complying with the law. The CRA takes any allegation of non-compliance very seriously and reviews comments like yours to determine if further action is necessary.

The confidentiality provisions of the Income Tax Act and the Excise Tax Act do not allow me or any CRA official to comment on the tax issues of any taxpayer without the taxpayer's written consent. Therefore, I am unable to comment on the specifics of any particular case you reference to in your emails. However, I can offer you the following general information about the tax aspects of your various concerns.

Before discussing tax considerations, I would like to comment on two of your observations about Internet telephone services.

You ask if the approval of the Canadian Radio-television and Telecommunications Commission (CRTC) is required before foreign companies can offer Internet services to Canadians. It is my understanding that the CRTC studied the Internet and decided not to regulate it. The CRTC Web site offers more information regarding this matter at www.crtc.gc.ca/eng/faqs.htm.

Regarding foreign exchange on an invoice for an Internet service, any billing from a United States (U.S.) provider would normally be in U.S. dollars. The amount showing on your credit card invoice would be the Canadian dollar equivalent to the U.S. dollar amount. The difference between the two amounts is not a fee charged by your bank or your credit card company, but is the difference in value between the two currencies. There is no legal requirement for a foreign Internet service provider to quote prices in Canadian currency.

Under the Excise Tax Act, a person carrying on business is generally required to collect and remit the goods and services tax/harmonized sales tax (GST/HST) on a taxable supply of services made in Canada. However, a supply of services made in Canada by a non-resident is deemed by the Act to be made outside Canada, unless the non-resident carries on business in Canada for GST/HST purposes, which means that the business activity in question is done regularly or continually. As well, the Act contains specific rules concerning the place in which telecommunication services are provided. Determining if a non-resident is carrying on business in Canada for GST/HST purposes depends on the facts of the particular case.

For more information on this topic, I invite you to read Guide RC4027, Doing Business in Canada - GST/HST Information for Non-Residents, and Guide RC4022, General Information for GST/HST Registrants, which are available on the CRA Web site at www.cra.gc.ca/E/pub/gp/rc4027 and www.cra.gc.ca/E/pub/gp/rc4022, respectively.

For income tax purposes, a non-resident doing business in Canada is subject to tax on profits earned. As a general matter, it is a question of fact whether business activities are carried on in Canada. The essential question is if Canada is the place of a profit-producing activity. When making the "in Canada" determination, the CRA considers a number of factors. In traditional forms of business, such as the sale of goods, the most important factor is generally the place of contract. A service business is considered to be carried on at the place or places where the services are performed.

Canada has signed a number of tax treaties with other countries to prevent tax avoidance and eliminate double taxation. Under the Canada-United States tax treaty, a U.S. resident will be subject to tax in Canada on its business profits only if they are attributable to a permanent establishment in Canada.

A person paying a non-resident for services rendered in Canada is required to withhold and remit 15% of the payment. This type of withholding represents a payment on Canadian income tax that may be payable by the non-resident on its profits from a business carried on in Canada. Provisions exist to refund the withheld tax to the non-resident to the extent that the actual tax liability (reduced by a tax treaty, if applicable) is less than the amounts withheld.

In addition to taxes on business profits, a payment made to a non-resident by a Canadian resident can be subject to a withholding tax if the payment is made in respect of certain passive income such as interest, rent of property in Canada, and royalties. The withholding tax rate is 25% unless it is reduced by a tax treaty. This withholding is the final tax liability to Canada on such income.

Under the above-described rules, a Canadian resident would not be required to withhold or remit tax from a payment to a non-resident for use of an Internet server outside of Canada or for the storage of data on a server outside of Canada. This would apply whether or not the payment was made to a person who was eligible for benefits under one of the existing tax treaties.

Canada's tax system is based on voluntary compliance and self-assessment. While the majority of Canadians obey the law and pay their taxes, there will always be individuals and organizations that, for a variety of reasons, fail to comply. The CRA works hard to identify and correct non-compliance by using a variety of tools to detect and prosecute those who fail to comply with Canada's tax laws.

The CRA conducts reviews, audits, and investigations to ensure there is a level playing field for all taxpayers. The CRA examines all categories of returns and selects files for audit using risk-assessment techniques, which are based on compliance profiles. According to the test results of a particular group of clients, the CRA can increase its audit reviews of these types of clients. In other cases, files are selected for audit because they are associated with previously selected files or because the CRA got leads from other audits or investigations, as well as information from outside sources.

When they suspect that businesses are not meeting their tax obligations, taxpayers, enforcement agencies, and foreign and domestic tax authorities often contact the CRA. Through its Informant Leads Program, the CRA encourages anyone with information about tax cheating to call one of its regional call centres at their toll-free number to report suspected cases of alleged tax improprieties. The CRA takes all allegations very seriously and reviews the information to ensure compliance with the provisions of the acts it administers. For more information on reporting suspicious activity, please go to www.cra.gc.ca/gncy/nvstgtns/tll_s-eng.html.

To determine if a telephone services provider based in the United States would be liable for tax on payments received from a Canadian customer is a question of fact, and all of the facts involved would need to be analyzed in detail. I am forwarding a copy of our correspondence to senior CRA officials for their consideration in future compliance activity reviews.

I appreciate the opportunity to respond to your questions.

Yours sincerely,

Gail Shea, P.C., M.P.

c.c.: Mr. Terrance McAuley
Assistant Commissioner
Compliance Programs Branch
18th Floor, Canada Building
344 Slater Street
Ottawa ON K1A 0L5

Philip Thompson
613-948-2233
2010-038619