26 June 1996 External T.I. 9611625 - WITHHOLDING TO PERSONAL SERVICES BUSINESS?

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.

Principal Issues:

whether corp. must withhold under 153(1) of the Act when it pays management and administrative consulting fees to another Canadian corporation (which is a personal service business)

Position:

No, although the personal service business may have to withhold in respect of salary and wages it pays to incorporated employees

Reasons:

153(1)(g) is broad enough to include payments from one Canadian corp. to another Canadian corp; however, there is no regulation to prescribe withholding. 105(1) applies only to non-residents and 105(2) says that 105(1) does not apply if the payment to the non-resident if for "remuneration" as defined in subsection 100(1) of the ITR

		961162
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

June 26, 1996

Dear Sirs:

Re: Subsection 153(1) of the Income Tax Act (the Act)

This is in reply to your letter of April 2, 1996 which asks whether subsection 153(1) applies to payments from a Canadian corporation to a "personal services business." You have asked that we consider the following hypothetical situation:

1.Mr. X is a Director and an officer (President) of a public corporation, Pubco. Mr. X receives no salary or other cash remuneration for acting as a Director and officer of Pubco. In his capacity as a Director, Mr. X has been issued employee stock options to acquire treasury shares of Pubco, at a discount.

2.Mr. X owns all of the issued shares of Xco. Xco provides management and administrative consulting services to Pubco and invoices Pubco on a monthly basis pursuant to a management consulting agreement between Xco and Pubco. Xco records the income it receives from Pubco as income from a "personal services business."

Your specific enquiry is whether Pubco is required to withhold income tax, under the provisions of subsection 153(1) of the Act, from its payments to Xco, which Xco receives in operating its personal services business.

You have expressed the opinion that subsection 153(1) of the Act should not apply in the circumstances. Your analysis has lead to the conclusion that, while subsection 153(1) of the Act could include payments of management fees from one corporation to another corporation resident in Canada, the current Income Tax Regulations (the Regulations), under which such withholding occur, are not broad enough to cover such situations. The Regulations only require withholding of income tax on payments to employees or payments to non-residents.

Our Comments:

We have assumed, for the purposes of our reply, that Xco is carrying on a "personal services business," as defined in subsection 125(7) of the Act.

We agree with your finding that Pubco is not required to withhold income tax under subsection 153(1) of the Act when paying for management and administrative consulting services provided by Xco. In computing the income from a personal services business, paragraph 18(1)(p) generally prohibits deductions with the exception of certain expenses such as salaries and wages paid to an incorporated employee of the corporation. Xco would be required to withhold income tax on such salaries and wages under subsection 153(1) because they would be payments described in subsection 153(1) of the Act.

The reference in paragraph 153(1)(g) of the Act to "every person paying at any time in a taxation year...fees, commissions or other amounts for services" is broad enough to include the payment of management fees from one corporate entity to another. Further, we note the general requirement found in section 101 of the Regulations for every person who makes a payment described in subsection 153(1) of the Act to deduct or withhold from such payments, but only in accordance with rules prescribed under Part I of the Regulations. Since there are no such rules in Part I of the Regulations dealing with a payment which is a "fee, commission or other amount for services," from one Canadian resident corporation to another, no withholding will be required on such payments.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch