29 April 2014 External T.I. 2013-0504661E5 - Withholding tax on commissions and QSBCS

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 a Canadian-controlled private corporation ("OPCO") shall withhold tax on a payment to a non-resident person for a commission and referral fee in respect of services rendered outside of Canada. 2)Whether OPCO shares qualify as Qualified Small Business Corporation Shares ("QSBCS") as that term is defined in subsection 110.6(1) if OPCO is carrying on an active business in Canada and outside Canada.

Position: 1) Commission and referral fees are not subject to Canadian withholding under Regulation 105 when no service is rendered in Canada. 2) Depends on the facts.

Reasons: 1. Services are not rendered in Canada by non-residents. 2. Conditions stated in the Act.

XXXXXXXXXX
2013-050466

April 29, 2014,

Dear XXXXXXXXXX:

Re: Withholding Tax and Qualified Small Business Shares

This is in response to your letter received on September 13, 2013, wherein you asked for our interpretation on two different issues as follows:

1. Whether a Canadian-controlled private corporation ("OPCO") shall withhold tax on a payment to a non-resident person for a commission and referral fee in respect of services rendered outside of Canada.

2. Whether OPCO shares qualify as Qualified Small Business Corporation Shares ("QSBCS") as that term is defined in subsection 110.6(1) if OPCO is carrying on an active business in Canada and outside Canada.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (the "Act"), and the Income Tax Regulations thereunder are referred to as the "Regulations".

Our Comments

Paragraph 153(1)(g) of the Act specifically provides that "every person paying at any time in a taxation year [...] fees, commissions or other amounts for services, other than amounts described in subsection 115(2.3) or 212(5.1) [...] shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall [...] remit that amount [...]". The "prescribed rules" are found in subsection 105(1) of the Regulations, which provides that "every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever shall deduct or withhold 15 per cent of such payment".

Whether a payment to a non-resident person 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 relevant facts and circumstances, including all of the relevant agreements. There is generally no withholding requirement under subsection 105(1) of the Regulations where a person makes a payment to a non-resident person for services that are not performed or rendered in Canada.

Regarding your second question, if an individual (other than a trust) is resident in Canada throughout the year and realizes a taxable capital gain on the disposition of QSBCS in that year, that individual may be entitled to a capital gains deduction in calculating his or her taxable income pursuant to subsection 110.6(2.1) of the Act. The definition of QSBCS in subsection 110.6(1) of the Act incorporates, inter alia, three main tests, as briefly discussed below, that must be met in order for the individual's shares to be considered as QSBCS for these purposes.

1) Small Business Corporation ("SBC") Test

The first test, in paragraph (a) of the QSBCS definition, examines the use of the particular corporation's assets at the time the shares are sold (i.e., the "Determination time") and requires that the shares must be the shares of a SBC at the Determination time.

Under the definition of SBC in subsection 248(1) of the Act, a corporation will, inter alia, be a SBC at any particular time where, subject to subsection 110.6(15) of the Act, the particular corporation is a Canadian-controlled private corporation ("CCPC") and all or substantially all (i.e., generally 90% or more) of the fair market value ("FMV") of its assets at that time is attributable to assets that are

(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares of the capital stock or indebtedness of one or more SBCs that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the SBC is at that time a "payer corporation" within the meaning of that subsection), or

(c) described in paragraphs (a) and (b).

2) Holding Period Ownership Test

The second test, in paragraph (b) of the QSBCS definition, requires an examination of the continuity of ownership of the particular shares during the 24 month period immediately before the sale. This test requires that throughout a period of 24 months immediately preceding the Determination time, the particular share or shares must not have been owned by any person or partnership other than the individual or a person or partnership that was related to the individual.

3) Holding Period Asset Use Test

The third test, in paragraph (c) of the QSBCS definition, requires an examination of the use of the corporation's assets throughout the 24 month period immediately preceding the sale of the shares of the particular corporation. This test requires that the corporation must be a CCPC during that time and more than 50% of the FMV assets of the corporation must be attributable to "Eligible assets". Eligible assets would consist of:

(i) assets used principally in an active business carried on primarily in Canada by the corporation or by a related corporation; and/or

(ii) shares or indebtedness of connected corporations where such corporations are CCPCs that also meet the 50% Holding Period Asset Use Test.

In the situation described in your letter, a review of all the relevant facts, documentation and circumstances would be necessary to reach a definitive conclusion on whether the OPCO's shares meet all the conditions set out in the definition of QSBCS at the Determination time.

However, based on the limited facts provided, it is our view that it is reasonable to consider that the first test (SBC test) of the definition of QSBCS would not be met and consequently the OPCO's shares would not be considered QSBCS, if the FMV of the assets used principally in the active business carried on primarily outside Canada exceeded 10% of FMV of all of OPCO's assets at the Determination time.

We trust that these comments will be of assistance.

Yours truly,

Guy Goulet, CPA, CA, M. Fisc.
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch