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: A Canadian corporation makes payments to an unrelated U.S. corporation for the provision of information. What are the Canadian tax implications to the payor?
Position: Withholding applies depending on the nature of the payments.
Reasons: If the payments are for services to a non-resident, Regulation 105 applies. If the payments are for the provision of commercial information or customer lists, subparagraphs 212(1)(d)(ii) applies. However, under the Treaty, the exemption under Article XII(3)(c) will reduce the withholding tax rate to nil.
XXXXXXXXXX
2012-045795
K. Podor
September 21, 2012
Dear XXXXXXXXXX:
Re: Payments to U.S. Corporation
This is in response to your correspondence of August 1, 2012 wherein you requested our opinion regarding the withholding tax implications to a Canadian corporation (Aco) that pays commissions to an unrelated U.S. corporation (Bco). Specifically, you are concerned whether the payments will fall within section 105 of the Income Tax Regulations (the “Regulations”) of the Income Tax Act (the “Act”) or paragraph 212(1)(d) of the Act.
Aco and Bco carry on business as insurance brokers. Aco has entered into a contract with Bco wherein Bco will, from time to time, provide Aco with customer information. Certain of Bco’s U.S. customers wish to arrange insurance products for assets situated in Canada. In consideration for this information, Bco receives a portion of the commission earned by Aco. Bco does not carry on business in Canada and does not have a permanent establishment in Canada.
Your request for our opinion appears to be in respect of either a contemplated or completed transaction. In accordance with paragraph 22 of Information Circular 70-6R5, “Advance Income Tax Ruling”, dated May 17, 2002, a contemplated transaction is dealt with by this Division in the form of an advance income tax ruling whereas a completed transaction is handled by the appropriate Tax Services Office. Information Circular 70-6R5 and other Canada Revenue Agency (CRA) publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menue.html. However, we are prepared to provide you with the following general comments which may be useful for your purposes.
Our Comments
It is a question of fact whether or not the payment being made is a fee in respect of services rendered in Canada or a payment for information. You indicate that Aco locates a potential customer as a result of Bco’s expertise and contacts. In general, payments made to a non-resident for information concerning industrial or commercial experience fall within subparagraph 212(1)(d)(ii) of the Act. Under subparagraph 212(1)(d) of the Act, the Canadian payor would be required to withhold and remit tax of 25% of the gross payments and file an information return pursuant to subsection 202(1) of the Regulations of the Act.
If the payments are made to a corporation that is a resident of the United States (U.S.) for the purposes of the Canada-United States Tax Convention (the “Treaty”), we must also consider the tax consequences under the Treaty.
Where a resident of the U.S. is in receipt of payments for services made in the course of its business carried on in the U.S., it would be exempt from taxation in Canada by virtue of paragraph 1 of Article VII of the Treaty. However, paragraph 6 of Article VII of the Treaty states that if an element of the business profits is dealt with separately in other provisions of the Treaty, then those provisions are to be considered. In our view, payments made to a non-resident for information concerning industrial or commercial experience fall under the provisions of Article XII of the Treaty.
The term “royalties” is defined in paragraph 4 of Article XII of the Treaty and includes, inter alia, payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Paragraph 3 identifies four classes of royalty payments arising in one Contracting State and beneficially owned by a resident of the other that are exempt at source. The exemption under paragraph 3(c) covers payments for information concerning commercial and industrial experience. Therefore, a nil rate of tax applies to the gross amount of payments for the use of, or the right to use, information concerning industrial or commercial experience.
Additional guidance on the Part XIII withholding tax rates applicable to such payments is contained in Information Circular (IC) 76-12R6, “Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention”.
We trust these comments are helpful.
Lita Krantz, CA
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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