21 December 1998 External T.I. 9805755 - PART XIII TAX LIABILITY WITH OR WITHOUT AGENT

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 a Canadian taxpayer who pays timber royalties to a non-resident’s agent without deducting and remitting Part XIII tax may be liable for Part XIII tax where the non-resident's agent fails to remit Part XIII tax to the Receiver General?

Position: Yes, even though assessments will normally be raised by the Department against the agent, in case of non compliance, the Canadian taxpayer may be assessed under subsections 215(1) and (6) of the Act, in certain situations.

Reasons: Precedent in Curragh Inc. v. Her Majesty the Queen, 94 DTC 1894 (TCC).

XXXXXXXXXX 5-980575
Marie-Marthe Gagnon
December 21, 1998

Dear Sir:

Re: Timber Royalties

This is in reply to your letter of February 26, 1998, in which you requested information regarding the obligation to withhold Part XIII tax under subsection 215(1) of the Income Tax Act (hereafter the “Act”). We apologize for the delay in responding to your letter.

FACTS

Mr. A, a non-resident who does not carry on business in Canada, is the owner of a woodland situated in Canada. A Canadian lumber corporation (hereafter “Canco”) has obtained a 20 year contract which allows it to cut the trees on this land. Canco would make annual timber royalty payments directly to Mr. A.

Mr. A’s Canadian representative has requested that Canco does not withhold Part XIII tax on these payments since Mr. A has a non-resident tax number (NRYxxxxxxx).

QUESTIONS

1. Does Canco have the obligation to withhold Part XIII tax with respect to the timber royalty payments if it makes these particular payments directly to Mr. A?

2. Would Canco still be liable for Part XIII tax if Canco pays the timber royalties to Mr. A’s Canadian agent (hereafter the «Canadian agent»).

OUR COMMENTS

Our Directorate will only deal with inquiry relating to an actual proposed transaction which involves a specific taxpayer in the form of an advance income tax ruling request as described in Information Circular 70-6R3 (dated December 30, 1996). However, we provide the following general comments which, in accordance with the above-mentioned Information Circular, are not binding on the Department with respect to a particular factual situation.

Question # 1

A non-resident person who receives timber royalty payments is subject to Part XIII tax under paragraph 212(1)(e) of the Act. Subject to any relevant tax treaty, the payer has to withhold and remit Part XIII tax at the rate of 25% on the gross amount of the timber royalty payments pursuant to subsection 215(1) of the Act.

Subsection 215(6) of the Act provides, among other things, that when a person fails to deduct or withhold any amount as required by section 215 of the Act, from an amount paid to a non-resident person, that person is liable to pay as tax under Part XIII on behalf of the non-resident person, the whole of the amount that should have been deducted or withheld.

Accordingly, it is our view that in the situation described above, if Canco fails to withhold Part XIII tax from the timber royalties paid to Mr. A, Canco is liable to pay the amount that should have been withheld and remitted on behalf of Mr. A, by virtue of subsections 215(1) and (6) of the Act.

Question # 2

Subsection 215(3) of the Act provides, among other things, that when an amount on which an income tax is payable under Part XIII is paid to an agent of a non-resident person by a payer without the tax having been withheld under subsection 215(1) of the Act, the agent must withhold and remit that amount to the Receiver General on behalf of the non-resident person. Under subsection 215(6) of the Act, where the agent fails to withhold any amount as required under subsection 215(3) of the Act, the agent is liable to pay such an amount on behalf of the non-resident.

In case of non compliance to section 215 of the Act, the Department will normally raise an assessments against the agent. However, even if the agent is liable, there is no provision in the Act that would relieve the payer of its liability to pay Part XIII tax on behalf of the non-resident when his agent fails to withhold and remit Part XIII tax on his behalf.

Such were the cases in Havlik Enterprises Limited v. M.N.R. 89 DTC 159 and in Curragh Inc. v. Her Majesty the Queen, 94 DTC 1894 (TCC). In that later case, the taxpayer, Curragh Inc. borrowed $35 million from G Ltd., a non-resident corporation incorporated in Australia. During the period from July 1987 to December 1988, at G Ltd.’s request, the taxpayer made monthly interest payments in respect of the loan to an Ontario numbered corporation which was a wholly owned Canadian resident subsidiary of G Ltd. without withholding any tax under Part XIII of the Act. The Department assessed the taxpayer for tax, interest and penalties on the basis that it had failed to deduct and remit the 15 per cent Part XIII tax in respect of the said interest payments made to the numbered corporation during those years. The taxpayer appealed without success to the Tax Court of Canada. In this regard, Mogan, J. stated at page 1899:

Subsection 215(3) makes it a condition of the agent’s liability that he has received the payment "without the tax having been withheld or deducted under subsection (1)". Counsel for the Appellant argues that the presence of those words in subsection 215(3) is a clear indication that the initial Canadian payor has no obligation to withhold and remit if the payment is made to a Canadian agent of the non-resident. I do not agree. Those words are only a condition to be satisfied before the agent will become liable. And that condition will more likely be satisfied if the initial Canadian payor has no knowledge of the non-resident principal. But when the initial Canadian payor knows that he is paying an agent resident in Canada acting on behalf of a non-resident principal, then I would hold (in accordance with the decision in Havlik) that the initial Canadian payor and the agent are jointly liable under subsections (1), (3) and (6) of section 215.

Finally, Mr. A’s Canadian representative states that Mr. A has a non-resident tax number. This statement suggests that the Canadian agent may already be registered as a non-resident tax remitter since that is the general practice followed by our department in this type of situation.

If you have any question concerning the withholding of Part XIII tax, you may contact Sylvie Cloutier-Lacasse at (613) 946-1970.

We trust our comments will be of assistance to you.

Yours truly,

Maurice Bisson, CGA
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Sylvie Cloutier-Lacasse, International Tax Directorate