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: In light of the rolling 183 day test in subparagraph 9(a) of Article V of the Treaty, is the CRA developing a policy with respect to late filed T1 returns?
Position: The CRA may apply the taxpayer relief provisions to have any interest and/or penalties waived. Taxpayers will have to advise the CRA of their circumstances, and the CRA will review each request on the basis of the information provided.
2010 CTF Deemed PE Rule in Article V(9)(a) of the Canada-US Income Tax Convention
Under article V(9) of the Canada-US treaty, the existence of a permanent establishment (PE) may be triggered retroactively after the taxpayer's year-end, which can result in inadvertent non-compliance with respect to the filing of Canadian T1 personal income tax returns and the payment of taxes (or withholdings) on a timely basis.
Assume that Mr. X, an individual resident in the United States, is in the business of providing professional engineering services. He was not present in Canada during calendar year 1. Mr. X applies for and obtains regulation 105 waivers in respect of amounts paid to him for the services that he will provide in Canada from October 1, year 2 until the end of February, year 3. (In particular, Mr. X will obtain a waiver for the period from October 1, year 2 to December 31, year 2 and another waiver for the period from January 1, year 3 to February 28, year 3).
Mr. X is present in Canada for 130 days during the period from October 1, year 2 to February 28, year 3. He has no plans to return to Canada later in year 3. He does not perform these services through a PE in Canada (within the meaning of articles V(1)(8) of the treaty), and he is not deemed to have a PE in Canada by virtue of article V(9), since he has not been present in Canada for more than 183 days in any 12-month period and has no plans to return to Canada. On the filing-due date for his tax return in Canada for year 2, Mr. X still has no plans to return to Canada in year 3. As a result, he is not at that time liable for Canadian income tax, and he is not required to file a Canadian T1 personal income tax return by the June 15, year 3 filing-due date.
However, on July 1, year 3, Mr. X returns to Canada to perform services until the end of August, year 3. His presence in Canada for this period totals 60 days. Now, during the 12-month period commencing October 1, year 2 and ending September 30, year 3, he is present in Canada for periods totalling 190 days. Based on the number of days of presence in Canada in the 12-month period, a waiver of withholding tax on payments in respect of the services provided from July 1, year 3 to August 31, year 3 would not be granted. Assume also, that from October 1, year 2 to February 28, year 3 and July 1, year 3 to August 31, year 3, 70 percent of all of Mr. X's gross active business revenues consists of income derived from the services Mr. X performed in Canada. Since both of the criteria in article V(9)(a) of the treaty are satisfied, Mr. X is deemed to have a PE in Canada retroactively to the first day on which he provided services in Canada (October 1, year 2). As a result, Mr. X is required to file a Canadian T1 personal income tax return (by June 15, year 3). If there was a balance of Canadian income taxes owing in respect of the year 2 taxation year, that balance was due on or before April 30, year 3. Also the withholding tax waivers granted for services provided from October 1, year 2 to February 28, year 3, although valid at the time they were granted, would not have been granted by the CRA had it been known that Mr. X would return to Canada in July, year 3.
1) Would the CRA consider waiving the penalties for late payment or late filing and the interest on the penalties?
2) What is the CRA's administrative policy in respect of any waivers that it previously granted pursuant to regulation 105, which will no longer be valid as a result of the deemed PE?
1) Although the existence of a PE may be triggered retroactively after the taxpayer's year-end, the CRA has no way of predicting who will inadvertently late-file his or her T1 personal income tax returns as a consequence of the application of article V(9)(a) of the treaty. The CRA may apply the taxpayer relief provisions to have any interest and/or penalties waived. Taxpayers will have to advise the CRA of their circumstances, and the CRA will review each request on the basis of the information provided.
2) The CRA does not expect retroactive remittances for the period of time where the year 2 and year 3 waivers were valid (that is, in the example above, for the payments made for services performed from October 1, year 2 to February 28, year 3). In the example, the CRA will require the appropriate Canadian income tax withholdings on all payments made to Mr. X for services provided in Canada from July 1, year 3 to August 31, year 3. In addition, Mr. X is required to file a Canadian T1 personal income tax return for the year 2 and year 3 taxation years and pay the resulting part I Canadian income tax liability.
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