22 April 1994 External T.I. 9333065 - NON-RESIDENT WITHHOLDING TAXES

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.

									933306

XXXXXXXXXX							Olli Laurikainen

Attention: XXXXXXXXXX

April 22, 1994

Dear Sirs:

Re: Non-resident Withholding Tax

This is in reply to your letter dated November 11, 1993.

Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").

You request our view concerning the interaction of the withholding requirements of Part XIII of the Act with section 105 of the Regulations to the Act (the "Regulations") in the following hypothetical fact situation:

1) A Co. is a corporation resident in Canada.

2) Foreign Co. is a corporation resident outside Canada.

3) Foreign Co. has developed a computer program which can be used on a computer network belonging to A Co. A Co. has entered into a license agreement with Foreign Co. whereby Foreign Co. retains all proprietary rights associated with the program and A Co is entitled use the program on its computer network. As consideration for the right to use the software program, A Co. has agreed to pay Foreign Co. a royalty based on a percentage of its sales.

4) The royalties described in paragraph 3 above are taxable under Part XIII of the Act pursuant to subparagraph 212(1)(d)(i) of the Act.

5) Foreign Co. has also agreed to provide, in Canada, technical support to A Co. in relation to the operation of the computer program. As consideration for this service A Co. will pay Foreign Co. a fee again calculated by reference to A Co.'s sales.

6) The fees described in paragraph 5 above are taxable under part XIII of the Act pursuant subparagraph 212(1)(d)(iii) of the Act.

7) Foreign Co. has no permanent establishment in Canada.

You question whether the payments described above would also be subject to withholding pursuant to section 105 for the Regulations.

It would be necessary to review the relevant agreement(s) to confirm that the payments described in paragraphs 3 and 5 above fall under paragraph 212(1)(d) of the Act and the definition of "royalties" in the Royalty article of the relevant income tax convention, if any. However, we provide the following general comments.

It is our view that a payment described in subparagraph 212(1)(d)(i) of the Act would not generally represent a fee, commission or other amount for services rendered in Canada. Accordingly, it is our view that the royalty payment described in paragraph 3 above, while subject Part XIII tax, would not be subject to withholding under section 105 of the Regulations.

A fee for services rendered in Canada as described in paragraph 5 above does however fall under section 105 of the Regulations. The fact that the subject payment may be also be subject to Part XIII withholding tax or is exempt from taxation in Canada pursuant to an income tax convention, would not cancel or override the requirement to withhold tax under section 105 of the Regulations. As indicated in paragraph 16 of Information Circular 75-6R dated January 15, 1988 however, requests for a waiver or reduction of the amount required to be withheld under section 105 of the Regulations may be submitted to the Chief of Source Deductions of the District Taxation Office that serves the area where the services are to be rendered. In circumstances such as those described above it may be appropriate to also provide a copy of the relevant agreement(s) with the request for waiver.

While it is a question of fact, where services are rendered in Canada by a non-resident for an extended period of time or on a recurring basis, at or from, a particular site, the non-resident may have a permanent establishment in Canada. In determining whether a section 105 waiver should be issued, the District Office should be supplied with all the relevant information necessary to determine whether a permanent establishment exists including the amount of time spent in Canada, over what period(s) and where the services will be provided in Canada.

We trust the above is of assistance to you.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch