18 October 1993 External T.I. 9323355 F - Provision of Services and Information (T2 File)

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Paragraph 212(1)(d) of the Income Tax Act (the "Act")

This is in reply to your letter of August 11, 1993 wherein you requested our opinion concerning the following situation.

Company M is a resident of country A, a country with which Canada does not have a tax treaty, and performs services for a company resident in Canada. The Canadian company is not carrying on business in country A. Company M, through its expertise and contacts, has located a potential buyer for the Canadian company's products. Company M is not involved in the day-to-day sales of products, however, it may act as an intermediate between the purchaser and the Canadian company on a regular basis. Company M is paid on a commission basis.

You are concerned whether the commissions paid to Company M for the above services will fall within the exemption provided under subparagraph 212(1)(d)(iii) of the Act. If the above exemption is not applicable, you are concerned with Revenue Canada's interpretation of the expression "in connection with" as used in such subparagraph.

Your request for an opinion appears to be in respect of either a contemplated or completed transaction. In accordance with paragraph 21 of Information Circular 70-6R2, the former type of transaction could only be dealt with by this Division in the form of an advance income tax ruling whereas the latter type of transactions are handled by the appropriate District Taxation Office. However, we are prepared to provide you with some general comments which may be useful for your purposes.

It is always a question of fact in the above situation whether or not the payment being made is a fee for services or a payment for information since you indicated that the potential buyer was located as a result of Company M's expertise and contacts. It is probable that the initial payment is being made by the Canadian company in respect of information concerning industrial or commercial experience and such payments would generally fall within subparagraph 212(1)(d)(ii) of the Act. That subparagraph does not provide for an exemption from withholding tax where the payment is made in connection with the sale of property or the negotiation of a contract as does subparagraph 212(1)(d)(iii) of the Act. If the payments are considered to be made, with respect to services which may be provided on an ongoing basis, such payments may fall within subparagraph 212(1)(d)(iii) of the Act. It is a question of fact whether or not such payments would fall within the exemption provided therein.

Revenue Canada has no written guidelines concerning the relationship that must exist between the services provided and the negotiation of a contract in order for the taxpayer to fall within the expression "in connection with" as used in subparagraph 212(1)(d)(iii) of the Act. The expression "in connection with" would appear to have a broad connotation, however, as indicated in the case of Gene A. Nowegijick v. the Queen (83 DTC 5041), the Court indicated that such an expression is not as wide in scope as the expression "in respect of". Since the matter involved is a question of fact, you may wish to discuss the matter with the appropriate District Taxation Office.

The District Taxation Office would have to be made aware of the relationship between Company M and the Canadian Company, copies of the agreements between the two companies and any other relevant information in order to determine which of subparagraphs 212(1)(d)(ii) or (iii) applies and whether the exemption in subparagraph 212(1)(d)(iii) is applicable.

We trust the above comments will be helpful to you.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch