20 August 2012 External T.I. 2012-0455001E5 - Withholding Obligations

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: 1) Whether the comments in Technical Interpretations 9611625, 2003-0021605 and 2000-0005305 are still applicable. 2) What is meant by "bona fide contract for service"?

Position: 1) Generally, yes. 2) Normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length.

Reasons: 1) No changes to previous position. 2) IT-433R paragraph 5.

XXXXXXXXXX
 							2012-045500

 							Charles Rafuse

 							XXXXXXXXXX

August 20, 2012

Dear XXXXXXXXXX:

Re: Withholding Obligations - Payments To Incorporated Individuals

This is in response to your email of July 4, 2012 and our telephone conversation (XXXXXXXXXX/Rafuse) wherein you asked whether the comments in Technical Interpretations (“TIs”) # 9611625, 2003-0021605 and 2000-0005305 still represent the Canada Revenue Agency’s (“CRA”) current views. In particular, you are only interested in such comments as they may pertain to a particular corporation’s withholding obligations on amounts it pays for management services provided to it by another corporation that carries on a “personal services business”, as that term is defined in subsection 125(7) of the Income Tax Act (the “Act”).

You have also asked what is meant by the phrase “bona fide contract for service” in TI 2003-0021605.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, “Advance Income Tax Ruling”, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

While we cannot provide specific answers to your questions, generally speaking, the comments in the above-noted TIs, as they relate to withholding obligations in the circumstances set out in those documents continue to be applicable.

The term bona fide is not defined in the Act; however this term is Latin for “good faith” (i.e., it signifies honesty, the “real thing” and, in the case of a party claiming title as bona fide purchaser or holder, it indicates innocence or lack of knowledge of any fact that would cast doubt on the right to hold title). This definition can be found at TheFreeDictionary.com. As mentioned in paragraph 5 of Interpretation Bulletin IT-432R2 – Benefits Conferred on Shareholders, normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length. The determination of whether a bona fide contract for service exists can only be made on a case-by-case basis following a review of the specific terms and conditions of the particular contract and the actions of the particular parties.

We trust that these comments will be of assistance.

Yours truly

Michael Cooke, C.A.
Manager
Business and Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch