5 November 1981 Income Tax Severed Letter RCT-0428 F

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.

RE: Non-Resident Withholding Tax Management or Administration Fee or Charge

This is in reply to your memorandum of October 26, 1981 and further to our telephone conversation of November 4 concerning amounts to be paid by XXX to its non-resident subsidiary XXX.

While we agree with you that the words "management or administrative fee or charge", as set out in paragraph 212(1)(a), are sufficiently broad to encompass the type of fees to be paid to XXX do not agree that such fees are subject to Part XIII tax. Our interpretation of "Business profits", as set out in Article VII of the new Canada-U.K. Tax Convention (1978), is that management or administrative fees or charges would constitute a part of same. Since this "Business profits" article will be contained i-n most new treaties signed with other countries (including the proposed new treaty with the U.S.), we brought to the attention of our Provincial and International Relations Division our interpretation of the above-mentioned Article VII and were advised as follows:

"A basic principle of Canada's policy when negotiating tax treaties is that income from services performed by a resident of one State shall not be taxed in the other State unless those services are performed in the other State through a permanent establishment or a fixed base. The Department of Finance wishes to treat management fees, since they are paid for services rendered, according to this principle. Consequently, this issue is not specifically addressed in most new treaties but rather covered by -the business profits article.

There are exceptions to this rule (e.g. the signed treaty with Jamaica) when the other country insists on taxing such fees paid to someone in Canada."

Accordingly, where management fees are paid to a non-resident of a treaty country and the convention with that country does not deal specifically with management fees but simply contains the above-mentioned "business profits" article, the non-resident will not be subject to tax in Canada unless the charges can be said to be related to a business carried on by it in Canada through a permanent establishment.

The only recourse we seem to have left is to have our auditors keep close tabs on these situations to ensure that the provisions of section 67 would not deny as a deduction to the payor a portion of the charges on the basis that the outlay or expense was not reasonable in the circumstances.