21 November 1990 Ministerial Letter 902688 F - Non-Resident Withholding Tax on Distribution of Profits

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.

19(1)

November 21, 1990

Dear Sirs:

This is in reply to your letter of September 24, 1990 wherein you requested our opinion with respect to the following hypothetical situation:

Company A is a foreign corporation which makes substantial purchases from a Canadian exporter. In negotiation with its Canadian exporter, A was informed that the exporter was incurring significant additional costs because of difficulties in arranging shipping. Because of its purchasing power and the importance of A's contracts with the exporter, A was able to direct the exporter to its Canadian subsidiary B to handle and coordinate the land and ocean transaction of the exporter's products. B entered into an agreement with the Canadian exporter to provide these services.

B earns its revenue by the savings it is able to generate for the Canadian exporter. A has demanded a 40% of gross revenue payment on an ongoing basis from B. The 40% payment was chosen, as opposed to a flat fee, since the revenues generated by B may fluctuate because of the volume and revenue generated. A is in a position to demand such payment because of its significant influence with the exporter and its ability to influence the exporter's decisions to allocate the contract. Company A resides in a country that has a treaty with Canada similar to the OECD Model and A does not have a permanent establishment in Canada as defined in that treaty.

You have requested our opinion as to the applicability of non-resident withholding tax with respect to the payments made to Corporation A.

It is our view that in a transaction such as this, it is not possible to provide you with a definitive reply since the nature of the transaction cannot be determined without reviewing the related documents. However, we are prepared to provide you with some relevant comments.

It would appear that Company A could only demand 40 percent of B's revenue by virtue of the fact that it controls Company B since the payment has not been made for any goods or services provided to Company B by Company A. In our view the 40 percent payment probably represents a distribution of the profits of Company B and would constitute a dividend in the hands of Company A. Consequently, the 40 percent payment would not be deductible by Company B and Company A would be subject to 25% withholding tax unless relief is provide under a tax agreement or convention.

We trust that these comments will be useful for your purposes.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch