17 October 1986 Income Tax Severed Letter 5-0214 - [Non-Resident Withholding Requirements]

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.

A. Jane (613) 957-2126

October 17, 1986

Dear Sirs:

Re: Non-Resident Withholding Requirements

This is in reply to your letter of July 31, 1986 concerning the withholding requirement with respect to reimbursement or payment of expenses on behalf of a non-resident who performs services in Canada.

Our understanding of the situation you describe is as follows. A Canadian resident corporation proposes to contract with a U.S. based software firm for the purchase of software. The Canadian firm further proposes to contract, presumably with the U.S. software firm, for the services of U.S. consultants to do additional work on the software on location in Canada. As part of the proposed agreement the Canadian firm would pay directly or indirectly, or alternatively, could reimburse the U.S. firm in respect of the costs of hotel, airfare, meals, etc. for the consultants when travelling to and from Canada on behalf of the Canadian firm. Although in your view the fee for services paid by the Canadian firm to the U.S. firm is subject to withholding, you inquire as to the Canadian firm's responsibility to withhold tax on these reimbursements and as to whether the tax result would be different if these expenses were paid directly by the Canadian firm.

Provided our understanding of the facts is correct, in our view, a 15 per cent withholding under subsection 105(1) of the Income Tax Regulations (the "Regulations") is required in respect of travelling costs and other out of pocket expenses incurred by a non-resident in connection with services rendered in Canada. In our view the requirement to withhold applies whether these expenses are paid for directly by the Canadian firm on whose behalf the services are performed or whether these expenses are reimbursed by the Canadian firm to the non-resident. Subsection 105(1) of the Regulations requires that every person paying a fee or other amount to a non-resident in respect of services rendered in Canada shall deduct or withhold 15 per cent of the payment. In our view the fee or other amount referred to in subsection 105(1) of the Regulations includes both expense reimbursements and direct payment of out of pocket expenses incurred in respect of services performed in Canada.

On the other hand, if the Canadian firm contracts directly with U.S. consultants as individuals rather than with any firm or corporation with respect to the subject services and if the consultants are self- employed and not employees then, in our view, Articles XIV and XVII of the Canada-U.S. Income Tax Convention (1980) may apply to reduce the rate of withholding from 15 per cent to 10 per cent on the first $5,000 of remuneration paid to each consultant in respect of the performance of independent personal services in Canada.

We trust this will be of assistance.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch