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.
5-941967
XXXXXXXXXX (613) 957-8953
Attention: XXXXXXXXXX
April 11, 1995
Dear Sirs:
This is in reply to your letter dated July 27 1994, wherein you request a technical interpretation of subparagraphs 212(1)(d)(ii) and 212(1)(d)(iii) of the Income Tax Act (the "Act") in the following hypothetical fact situation:
-Aco, a Canadian controlled private corporation carries on a retail real estate services business in Canada. It obtains fees (commissions) from landlords who have entered into leases (contracts) with tenants who were introduced by Aco to the landlord. The fees are based on a percentage of the rent paid by the tenant according to the lease.
-Bco is a corporation incorporated in the United States of America and carries on a similar business with Aco in the United States. Bco is not resident in Canada, does not carry on business in Canada, and does not have a permanent establishment in Canada.
-Aco and Bco deal at arm's length with each other.
-Aco has entered into an agreement with Bco, wherein, Bco will from time to time, provide Aco with potential tenants who wish to establish operations in Canada. In consideration for the service, Aco will pay Bco a finder's fee equal to 50% of the fee Aco will obtain from a landlord for locating the tenant.
-The services provided by Bco will not be performed in Canada.
You would like to know if Bco will be required to pay income tax on the finder's fee paid by Aco, in accordance with subparagraphs 212(1)(d)(ii) or 212(1)(d)(iii) of the Act and if Aco will be required to withhold pursuant to subsection 215(1) of the Act or subsection 202(2) of the Income Tax Regulations.
As the situation you have outlined relates to a particular taxpayer, we are unable to comment specifically thereon as technical interpretations are only provided in respect of hypothetical situations. Notwithstanding this fact, we are prepared to offer the following general comments on the interpretation of subparagraphs 212(1)(d)(ii) and (iii).
We are of the view that the provisions of subparagraph 212(1)(d)(ii) or (iii) of the Act would be applicable to a payment of the type described above, and that the Canadian payer would be required to withhold an amount of 25% and to file an information return in prescribed form for such an amount as required by subsection 202(1) of the Regulations. However, where the payment is made to a resident of the United States, we have to determine the effect of the Canada-U.S. Income Tax Convention (the "Treaty").
Under paragraph 1 of Article VII of the Treaty, the business profits of a resident of the United States are only taxable there if the resident has no permanent establishment in Canada. However, if an element of the business profits of a resident of the United States is dealt with separately in other provisions of the Treaty, then those provisions are unaffected by the application of Article VII and would have to be considered by virtue of paragraph 6 of Article VII of the Treaty. The payments described in your letter do not appear dealt with in other provisions of the Treaty. The payments are made to a person that carries on a tenant referral business and as such it would appear that they can appropriately be characterized as payments for services. If a resident of the United States is in receipt of payments for services made in the course of its business carried on in the U.S., it would generally be exempt from taxation in Canada by virtue of paragraph 1 of Article VII of the Treaty.
A non-resident who is subject to withholding under Part XIII of the Act can apply for a refund of tax withheld if he is not taxable in Canada. In this regard, we refer you to Part II of Information Circular 77-16R4 dated May 11, 1992.
The foregoing comments are an expression of an opinion only, and as stated in paragraph 21 of Information Circular 70-6R2, they are not binding on the Department.
We trust this will be of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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