25 November 1996 External T.I. 9622935 - SUBCONTRACT FEES PAID TO FOREIGN AFFILIATES

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:

Application of paragraph 95(2)(b) where subcontract fees paid to foreign affiliate

Position:

Not enough information and question of fact - some guidelines given.

Reasons:

									962293
XXXXXXXXXX							J. Stalker

Attention: XXXXXXXXXX

November 25, 1996

Dear Sirs:

Re: Paragraph 95(2)(b) of the Income Tax Act (the "Act")

We are writing in response to your letter dated June 26, 1996 in respect of the application of paragraph 95(2)(b) of the Act to a situation where a Canadian taxpayer pays subcontract fees to a controlled foreign affiliate for the construction, installation and management of a project which will be carried out in a foreign country. We assume that subparagraph 95(2)(b)(ii) is not an issue.

Your request for an opinion does not contain sufficient information to determine whether subparagraph 95(2)(b)(i) of the Act would apply in such a situation. In any event such a determination would be a question of fact. For example, subparagraph 95(2)(b)(i) may not apply, depending on all the facts, where a controlled foreign affiliate is carrying on an independent business with its own employees in the appropriate type of work, and where a particular subcontract is a bona fide subcontract, comparable to that in an arm's length situation, as opposed to a method of allocating Canadian income to the foreign country. The fact that a foreign affiliate does similar types of contracts for arm's length parties would be additional support that the foreign affiliate is carrying on a business in its own right.

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