10 April 1986 Income Tax Severed Letter 5-0454

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Dear Sirs:

This is in reply to your letter of January 20, and further to your telephone conversation with the writer on April 2, asking if Part XIII tax is exigible in the following situation.

• 1. X Co. is a Canadian company resident in Canada.
• 2. X Co. will be entering into contracts with three non-resident individuals who will be performing marketing related services for the company.
• 3. All services will be performed outside Canada.
• 4. The individuals performing the services described above are in the business of providing such services in their respective countries.
• 5. The individuals will be paid on a per diem basis for the actual time spent in the performance of their contract, up to a maximum specified limit.

Since a proposed transaction is involved, we are not able to reply definitively to your request other than by way of an advance income tax ruling. In this regard, we refer you to the relevant comments in Information Circular 70-6R. We are, however, prepared to offer the following general comments.

Normally, where services of the type in question are performed entirely outside Canada, a Canadian tax liability with respect to the payment therefor would occur only if the provisions of either of paragraph 212(1)(a) or subparagraph 212(1)(d)(iii) of the Act apply, and then only to the extent that a reciprocal income tax treaty does not overdue those provisions. These two provisions are discussed below.

Paragraph 212(1)(a)

This paragraph of the Act subjects to Part XIII tax a "management or administration fee or charge". Paragraph 2 of Interpretation Bulletin 468 [IT-468] sets out the Department's views as to what constitutes a management or administration fee or charge. However, when payments for the type of services in question are made to an arm 5 length party, the comments in paragraph 2 of IT-448 become irrelevant because paragraph 212(4)(a) of the Act will override paragraph 212(1)(a) of the Act and render the payments exempt from tax, to the extent they are reasonable in the circumstances. In this latter regard, we refer you to the comments in paragraph 4 of IT-468.

Subparagraph 212(1)(d)(iii)

A payment for the type of services in question will not be subject to Part XIII tax under subparagraph 212(1)(d)(iii) of the Act provided the payment is

(a) not dependent in whole or in part upon
• (i) the use to be made thereof or the benefit to be derived therefrom, (ii) production or sales of goods or services, or (iii) profits,

or

• (b) made for services performed in connection with the sale of property or the negotiation of contracts.

Thus, if the payments in question satisfy the proviso referred to in (a) above (which appears to be the case), they will not be caught under subparagraph 212(1)(d)(iii) of the Act.

Reciprocal Income Tax Treaties

Notwithstanding that a particular payment might be caught under either of paragraph 212(1)(a) or subparagraph 212(1)(d)(iii) of the Act, a provision of a reciprocal income tax treaty may override those provisions of the Act. For example, where a payment for services is otherwise exigible to part XIII tax but the recipient is a resident of the U.S., the recipient may be able to look to either Article VII or Article XIV of the Canada-U.S. Income Tax Convention (1980) for an exemption.

We trust that the above comments will be of assistance.