16 April 1982 Income Tax Severed Letter 95-3836 F

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.

Dear Sir:

This is in reply to your letter dated February 24, 1982 enquiring whether a payment by a taxable Canadian corporation to its non-resident wholly owned subsidiary of a fee for executive recruiting services rendered by it constituted management or administration fees or charges within the meaning of paragraph 212(1)(a) of the Income Tax Act ("the Act").

The facts as we understand them are as follows:

1.      A corporation incorporated and resident in Canada (the "Canadian corporation") owns 100% of the capital stock of a corporation incorporated and resident in the U.S. (the "U.S. subsidiary").

2.      The U.S. subsidiary employs an individual (the "individual") who is a resident of the U.S. and not also dually a resident of Canada to carry on executive recruiting services world wide on the U.S. subsidiary's behalf.

3.      The Canadian corporation engages the U.S. subsidiary from time to time to recruit candidates for job openings with the Canadian corporation.

4.     The individual, on behalf of the U.S. subsidiary, seeks out, investigates, contacts, and interviews prospective candidates in Canada or elsewhere and furnishes the names of those he considers suitable to the Canadian corporation for the latter's consideration.

5.      The individual may, on occasion, meet with and talk to prospective candidates in Canada but neither the individual nor the U.S. subsidiary maintains a permanent establishment in Canada.

6.      On average, the time spent in Canada by the individual on an engagement to obtain a candidate for the Canadian corporation will represent 25% of the total time spent by him on the engagement.

7.      In all cases the Canadian corporation, and not the U.S. subsidiary, will decide which candidate, if any, will fill the position.

8.      The Canadian corporation has engaged and will occasionally continue to engage recruitment consultants other than the U.S. subsidiary to provide recruiting services. The U.S. subsidiary has provided and continues to provide recruiting services to other arm's length entities.

9.      The U.S. subsidiary invoices the Canadian corporation for fees for services rendered. The fees are usually calculated by applying a fixed percentage to the estimated yearly salary of the person to be hired in accordance with normal industry practice. The fees are payable whether or not the Canadian corporation eventually hires an individual referred by the U.S. subsidiary.

10. The quantum of the fee does not depend upon the identity of the party for whom the services were rendered. In other words, the U.S. subsidiary normally charges fees to an arm's length entity on the same basis as it does to the Canadian corporation.

As you are aware, a management or administration fee or charge is not defined in the Act and, as stated in paragraph 2 of Interpretation Bulletin IT-468, it is not possible to provide an all inclusive definition in a bulletin. Therefore, in presenting our view of what constitutes management or administration, we stated in the bulletin that, it "includes" the functions of planning, direction, control, coordination, systems or other functions at a managerial level. The word "includes", of course, was purposely used to make it clear that functions other than those specified could be encompassed by the term "management or administration". Accordingly, it is our view that employee recruiting services including the type of executive recruiting service described above would constitute a management or administration function for purposes of paragraph 212(1)(a) of the Act. This position is consistent with the position taken in IT-303, paragraph 24 regarding hiring.

In view of the foregoing, it is our opinion that to the extent that amounts paid by the Canadian corporation to its U.S. subsidiary can be established to represent the reimbursement to the U.S. subsidiary of specific expenses incurred by it in performing executive recruiting services for its parent, that, reimbursement would not, by virtue of paragraph 212(4)(b) of the Act, be a management or administration fee or charge and, accordingly, would not be subject to withholding tax under Part XIII of the Act.

However, any profit element contained in the amounts so paid is, in our view, a management or administration fee or charge for purposes of paragraph 212(1)(a) of the act and is subject to Part XIII withholding tax.

If the executive recruiting service fee or charge is not reasonable in the circumstances, the unreasonable portion, in addition to being subject to Part XIII tax, will be disallowed under section 67 or subsection 69(2) of the Act as an expense of the Canadian corporation (See IT-468, paragraph 7).

This opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case, and, in accordance with paragraph 24 of Information Circular 70-6R, it is not binding on the Department.