24 July 1995 External T.I. 9508225 - MANAGEMENT FEE AND CANADA-TRINIDAD TAX TREATY

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.

		950822
XXXXXXXXXX	S. Leung

Attention: XXXXXXXXXX

July 24, 1995

Dear Sirs:

Re: Management fees and Article V of Canada-Trinidad and Tobago Income Tax Agreement (the "Convention")

We are writing in reply to your letter of March 14, 1995 in which you requested our view as to whether certain fees received by Canco as described in the following hypothetical situation would be considered "industrial or commercial profits" referred to in Article V of the Convention.

The Hypothetical Situation

• Canco is a Canadian corporation incorporated and resident in Canada.
• Canco or an officer of Canco provides management services to a corporation ("Trinco") which was incorporated and is resident in Trinidad and Tobago ("T&T") and which is related to Canco. Canco receives fees (the "management fees") from Trinco in respect of management services rendered in T&T. The management fees are reasonable in the circumstances.
• Canco or an officer of Canco also provides computer related services in the nature of managerial, planning, training, technical, operational, marketing and development services to Trinco and receives fees (the "software maintenance fees") from Trinco as compensation. The software maintenance fees are not "royalties" as defined in paragraph 2 of Article X of the Convention.
• Canco does not have a permanent establishment in T&T.

Your Requests

You requested our view as to whether the management fees and software maintenance fees as described in the above hypothetical situation would fall within the definition of "industrial or commercial profits" under Article V of the Convention; if they would whether the Department would extend such interpretation to fees for personal (including professional) services rendered by an employee of Canco in T&T on behalf of Canco; and whether Canada would allow Canco a foreign tax credit for taxes paid to T&T in respect of such fees if such fees are included in the definition of "industrial or commercial profits" and, as a result, are tax exempt in T&T by virtue of Article V of the Convention.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable District Taxation Office should be consulted with respect to the income tax liabilities of such a taxpayer. It also appears that your questions should best be directed to the taxation authority of T&T as the interpretation affects T&T's (not Canada's) authority to tax. However, we can offer the following general comments.

It is a question of fact whether or not Canco has a permanent establishment in T&T and whether the management fees and software maintenance fees are reasonable in the circumstances and are royalties as defined in paragraph 2 of Article X of the Convention. On these matters we offer no comments.

Given the fact that the software maintenance fees are not considered royalties under Article X of the Convention and that Canco does not have a permanent establishment in T&T to which the management fees and software maintenance fees are attributable, the Department would consider the net income attributable to these fees earned by Canco, to the extent that they are reasonable, to be "industrial or commercial profits" (as defined in paragraph 6 of Article V of the Convention) tax exempt in T&T in accordance with the Convention. In this regard, you may refer to paragraph 2 of IT-468R and paragraph 9 of Information Circular 76-12R4 for the Department's views on such payments arising in Canada. As to whether or not the taxation authority of T&T would share this view, you may wish to contact them directly.

Our above comments do not apply to the remuneration received by any employees of Canco or Trinco who is a resident of Canada for the purposes of the Convention and who provides personal (including professional) services to Trinco. If the payments by Trinco are considered to be remuneration for personal (including professional) services, by virtue of paragraph 6 of Article V of the Convention, such payments would not fall within the definition of "industrial or commercial profits" for the purposes of that Article. Instead, the provisions of Article XI of the Convention may apply. In reference to the interpretation of paragraph 2 of Article XI of the Convention, it is a question of fact whether the individual who provides services in T&T to Trinco remains an employee of Canco. It is the Department's view that the employer is not necessarily the person who pays the salaries if that person is not the person to whom the individual reports on a daily basis.

Provided that the management fees and software maintenance fees are not subject to tax in T&T by virtue of Article V of the Convention because Canco does not have a permanent establishment in T&T, Canada would not allow a foreign tax credit for "taxes" paid to T&T in respect of those fees as Canco should be able to apply for a refund of such "taxes" from the T&T taxation authority. As described in paragraph 13 of Interpretation Bulletin IT-270R2, an amount of tax paid which will be refunded to the taxpayer is not considered to be tax paid for the year for Canadian foreign tax credit purposes. Should Canco encounter any difficulty in claiming a refund from the T&T taxation authority, it may follow the procedures outlined in Article XVIII of the Convention.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch