7 July 1989 Income Tax Severed Letter AC58032 - Non-resident Withholding Tax Exemption on Management or Administration Fees

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.

O. Laurikainen (613) 957-2125

19(1)

July 7, 1989

Dear Sirs:

Re: Subsection 212(4) of the Income Tax Act (the "Act")

This is in response to your letter of May 4, 1989, wherein you have requested a technical interpretation on the application of subsection 212(4) of the Act, to certain hypothetical situations. The situations you have described involve payments made by a company resident in Canada for the services of arm's length agents resident in a foreign country. The services, some of which may fall under the ordinary definition of "management or administration", are performed by the agents in the ordinary course of business carried on by them, that includes the performance of such a service for a fee, in the foreign country.

In our view, payments made for management or administration services by the Canadian resident directly to an agent engaged by it, would be excluded from the operation of paragraph 212(1)(a) by paragraph 212(4)(a) of the Act. Where a non-resident company, on behalf of the Canadian resident, engages the agent to perform those services, it is our view that any payment TO REIMBURSE the non-resident company, would be excluded from the operation of paragraph 212(1)(a) by paragraph 212(4)(b) of the Act. Under either scenario, the payment must be reasonable in the circumstances. The unreasonable portion, if any, in addition to being subject to Part XIII tax would be disallowed under section 67 or subsection 69(2) of the Act, as an expense of the Canadian resident. It is a question of fact whether an amount is considered reasonable in a particular situation. Accordingly, we are unable to comment on whether the fees in this case are reasonable under the circumstances. Fees paid for services falling outside the definition of "management or administration" would generally not be subject to tax in Canada under the circumstances set out above.

You have not indicated whether Canada has entered into an income tax convention with country X and/or country Z. Under most conventions, the business profits provisions are considered to encompass reasonable management fees and to exempt them from Part XIII withholding tax. See the comments in paragraph 9 of Information Circular 76-12R4.

The unreasonable portion, if any, may be subject to withholding tax under the dividend article of a convention by virtue of the operation of paragraph 214(3)(a) of the Act.

We hope the above will be of assistance to you.

Yours truly,

K.B. Harding for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch