15 July 2011 External T.I. 2011-0403551E5 - Management services agreement

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.

Principal Issues: In light of certain assumptions you have asked us the following questions: 1.Does the CRA agree that Article XV of the Treaty does not apply to the Service Fee? 2.Will Article XV apply to the remuneration earned by the US Employee for the services performed in Canada and if so, will the US Employee be exempt from Canadian tax pursuant to subparagraph 2(b) of Article XV of the Treaty? 3. If the US Employee is not subject to Canadian income tax on the remuneration earned for the services performed in Canada, may the US Employee request a waiver ("Regulation 102 Waiver") in respect of the requirement to withhold under section 102 of the Regulations to the Income Tax Act ("Regulations") and if so, will it be issued? 4. Is the US Employee required to file a personal income tax return in Canada?

Position: 1.Article VII will apply to the Service Fee paid by Canco to US Co. Canco has an obligation under paragraph 153(1)(g) of the Act and section 105 of the Regulations, to withhold 15% of the Service Fee paid to US Co pursuant to the Service Contract. 2. Article XV of the Treaty will apply to the remuneration earned by the US Employee for the services performed in Canada. The US Employee will be exempt from Canadian tax pursuant to subparagraph 2(b) of Article XV of the Treaty since the remuneration is not borne by Canco or a PE in Canada. 3. Since the US Employee is not subject to Canadian taxation on the remuneration for his services exercised in Canada, the CRA will grant a Regulation 102 Waiver in this case. 4. Pursuant to subsection 150(1.1) an individual is not required to file a Canadian income tax return for the year, if there is no Canadian tax payable under Part I of the Act for that year. Notwithstanding the foregoing, a non-resident individual must file a Canadian income tax return if he has a taxable capital gain (otherwise than from an excluded disposition) or disposes of a taxable Canadian property (otherwise than in an excluded disposition) in the year, or at the end of the year the individual's HBP balance or LLP balance (as defined in subsection 146.01(1) or 146.02(1)) is a positive amount.

XXXXXXXXXX 							Angelina Argento
								2011-040355
July 15, 2011

Dear XXXXXXXXXX ,

Re: Article XV of the Canada-US Income Tax Convention (the "Treaty")

This is in response to your email sent on April 18, 2011 wherein you asked us to assume the following facts:

• US Co is a corporation that is resident of the United States ("US") for the purposes of the Treaty. US Co is also a "qualifying person" as defined in paragraph 2 of Article XXIX-A of the Treaty;
• US Co does not currently and will not at any future time carry on business in Canada or have a permanent establishment ("PE") in Canada within the meaning of Article V of the Treaty;
• Canco is a corporation incorporated in and resident in Canada;
• Canco carries on business in Canada;
• US Co and Canco do not deal at arm's length;
• US Co and Canco concluded an intercompany services agreement ("Service Contract") where a fee ("Service Fee") is charged for intra-group services (such as administration, management, engineering or technical assistance);
• A US resident individual who is an employee of US Co ("US Employee") will be temporarily sent to Canada to perform services for Canco as required under the Service Contract;
• The US Employee, at all times, remains a resident of the US for purposes of the Treaty;
• The US Employee is present in Canada for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned;
• The US Employee will remain on the payroll of US Co and will be remunerated by US Co for the services performed during the period US Employee is in Canada;
• The US Employee, at all times, will remain an employee of US Co and will not be an employee of Canco in substance or in form;
• The total remuneration of the US Employee for the services performed in Canada in a particular calendar year exceeds $10,000 (Canadian);
• A Service Fee will be charged by US Co to Canco for the services provided under the Service Contract.

In light of the above assumptions, you have asked us the following questions:

1. Does the CRA agree that Article XV of the Treaty does not apply to the Service Fee?

2. Will Article XV apply to the remuneration earned by the US Employee for the services performed in Canada and if so, will the US Employee be exempt from Canadian tax pursuant to subparagraph 2(b) of Article XV of the Treaty?

3. If the US Employee is not subject to Canadian income tax on the remuneration earned for the services performed in Canada, may the US Employee request a waiver ("Regulation 102 Waiver") and if so, will it be issued?

4. Is the US Employee required to file a personal income tax return in Canada?

OUR COMMENTS

Question 1: Service Fee paid by Canco to US Co?

The Service Fee paid by Canco to US Co pursuant to the Service Contract is governed by Article VII of the Treaty. The Service Fee will not be subject to tax in Canada unless the Service Fee is attributable to a permanent establishment of US Co in Canada.

However, we note that Canco does have an obligation under paragraph 153(1)(g) of the Act and section 105 of the Regulations to withhold 15% of the Service Fee it pays to US Co pursuant to the Service Contract, as Canada generally does not, under the Treaty, relinquish its right to withholdings pursuant to section 105 of the Regulations pending a determination of the applicability of any exemption under the Treaty.

US Co in respect of which withholdings have been made pursuant to section 105 of the Regulations, may be entitled to a refund of the amounts withheld by virtue of the Treaty (i.e. if US Co does not carry on business in Canada through a permanent establishment in Canada). In order to apply for such a refund, a Canadian tax return must be filed by US Co in accordance with Part I of the Act together with appropriate evidence supporting US Co's claim for exemption pursuant to the Treaty.

In certain cases, pursuant to subsection 153(1.1), the CRA may grant a waiver or reduction of the withholding otherwise required under subsection 153(1) of the Act. In this regard, we refer you to paragraphs 56 to 62, Appendix A and Appendix B of Information Circular 75-6R2, "Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada", dated February 23, 2005.

Question 2: Application of Article XV of the Treaty to the remuneration paid to the US Employee for the services performed in Canada

Paragraph 2 of Article XV of the Treaty provides that employment income is taxable only in the employee's country of residence if

(a) the remuneration attributable to the work performed in the source State does not exceed ten thousand dollars ($10,000) in the currency of the source State; or

(b) the recipient (employee) is present in the source State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by, or on behalf of, a person who is a resident of the source State and is not borne by a permanent establishment in the source State.

In this example, the total remuneration of the US Employee in a particular calendar year exceeds $10,000 (Canadian), thus, Treaty relief from Canadian taxation will only be provided if the US Employee spends less than 183 days in Canada and the remuneration (for the services performed in Canada) is not paid by, or on behalf of a person who is a resident of Canada and is not borne by a PE in Canada.

The Technical Explanation to the Treaty states that subparagraph 2(b) of Article XV is intended to have the same meaning as the analogous provisions in the U.S. and OECD Model Income Tax Convention ("Model Treaty").

Subsection 6.2 of the Commentary to Article 15 of the Model Treaty states that the object and purpose of paragraph 2 of Article 15 is to avoid the source taxation of short-term employments to the extent that the employment income is not allowed as a deductible expense in the State of source (i.e. Canada, in this case) because the employer is not taxable in that State as he neither is a resident nor has a permanent establishment therein.

The facts assume that the US Co has no PE in Canada, the US Employee remains an employee of US Co and that US Co pays the US Employee's remuneration for the services provided in Canada. Accordingly, Canco is not the employer of the US Employee and the Service Fee paid by Canco to US Co is not viewed as being remuneration paid by Canco to the US Employee for the latter's services performed in Canada. Therefore, pursuant to subparagraph 2(b) of Article XV of the Treaty, the US Employee's remuneration is exempt from Canadian taxation.

Question 3: Regulation 102 Waiver

Pursuant to paragraph 153(1)(a) of the Act and section 102 of the Regulations, remuneration (footnote 1) paid to non-resident employees who provide services in Canada is subject to the same withholding, remitting and reporting obligations as that of Canadian resident employees.

The CRA will grant a Regulation 102 Waiver if a non-resident employee can provide evidence that the payments will be exempt under the Treaty. Paragraphs 86 to 96 and Appendix B of Information Circular IC 75-6R2 "Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada", dated February 24, 2005 ("IC 75-6R2") describe CRA's guidelines with respect to the granting of a Regulation 102 Waiver. Form R102-J, "Regulation 102 Waiver Application - Joint Employer/Employee" is an alternative application for a Regulation 102 waiver which may be made, provided the specific conditions required thereunder are satisfied (footnote 2).

Since the US Employee is exempt from Canadian taxation pursuant to subparagraph 2(b) of Article XV of the Treaty, the CRA will grant a Regulation 102 Waiver.

Question 4: Requirement to file a Canadian personal income tax return.

In the above example, the US Employee will not be taxable in Canada on his taxable income earned in Canada from rendering the employment services in Canada.

Pursuant to subsection 150(1.1) an individual is not required to file a Canadian income tax return for the year, if there is no Canadian tax payable under Part I of the Act for that year. Notwithstanding the foregoing, a non-resident individual must file a Canadian income tax return if he has a taxable capital gain (otherwise than from an excluded disposition) or disposes of a taxable Canadian property (otherwise than in an excluded disposition) in the year (footnote 3) , or at the end of the year the individual's HBP balance or LLP balance (as defined in subsection 146.01(1) or 146.02(1)) is a positive amount (footnote 4) .

We trust that this is the information you require.

Yours truly,

Olli Laurikainen
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 "Remuneration" is defined in section 100 of the Regulations.
2 See http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rndr/wthhldng-eng.html.
3 Paragraph 150(1.1)(b)(iii).
4 Paragraph 150(1.1)(b)(iv).