20 October 1983 Income Tax Severed Letter B-4635

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.

This is in reply to your memo of August 11, 1983 concerning the above-mentioned subject.

You have submitted the following facts:

XXX

You question whether paragraph 212(1)(a) of the Income Tax Act is applicable to the amount shown as a management fee on the taxpayer's NR4 for the 1981 taxation year XXX and also request our comments on whether the taxpayer is taxable in Canada under Part I of the Act.

On the assumption that our understanding of the facts as set out above is correct, our comments are as follows:

Part I of the Act

We are of the opinion that the fees paid to the taxpayer under the Agreement are compensation for personal services, taxable in Canada by virtue of paragraph 2(3)(b) and subparagraph 115(1)(a)(ii) of the Act. In our view, the profits derived from the services rendered personally by the taxpayer are not “industrial and commercial profits” of a U.S. enterprise within the meaning of Article I of the Canada-U.S. Tax Convention. Article VII (and not Article I) would be the applicable provision, since it deal-s explicitly with compensation for personal services. Consequently, the consulting fees are not exempted from Canadian tax by virtue of the Convention. The fees paid should have been subjected to withholding by virtue of paragraph 153(1)(g) of the Act and section 105 of the Income Tax Regulations, and the payor may be subjected to the penalty provisions of subsection 227(8) as a result of such failure.

Part XIII of the Act

In reply to your question concerning the application of the provisions of paragraph 212(1)(a) of the Act to the fees, in question, we note that if the taxpayer and XXX are dealing with each other at arm's length (which appears to be the case), the services performed by the taxpayer would meet the conditions of paragraph 212(4)(a) and would not be considered a “management or administration fee or charge” for the purposes of paragraph 212(1)(a) of the Act. In our view the said services are, in any case, p-robably not management services or charges as they do not relate to the “functions of planning, direction, control, co-ordination, systems or other functions at a managerial level”. (See paragraph 2 of Interpretation Bulletin IT-468).

As mentioned in XXX note attached to your memo, the provisions of sub-paragraph 212(1)(d)(iii) and subparagraph 212(1)(d)(iv) are arguably applicable to the payments in question: however, as provided in Regulation 805(1)(a) and as suggested above XXX would appear to be more correctly taxable under Part I of the Act.

We trust these comments will be useful to you and return herewith the documents that you had submitted.