13 May 2010 External T.I. 2009-0325921E5 - Regulation 105 withholding

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: Whether payments made to a non-resident for recruiting services are subject to Regulation 105 withholding

Position: Provided general comments.

Reasons: If the payments are for services rendered in Canada, Regulation 105 withholding would apply. If the payments are for services rendered outside of Canada, they are not subject to Regulation 105 withholding.

XXXXXXXXXX 						2009-032592

May 13, 2010

Dear XXXXXXXXXX :

Re: Withholding Requirement on Recruitment Services

We are writing in response to your letter of June 5, 2009 concerning the application of subsection 105(1) of the Income Tax Regulations (the "Regulations") to payments made by a corporation resident in Canada to a corporation resident in the United Kingdom ("UK") for the provision of recruitment services. You advise that such services are performed outside of Canada and you would like confirmation that the withholding requirement under subsection 105(1) of the Regulations will not apply.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Our Comments

Paragraph 153(1)(g) of the Income Tax Act (the "Act") specifically provides that "every person paying at any time in a taxation year...fees, commissions or other amounts for services, other than amounts described in subsection115(2.3) or 212(5.1)...shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall...remit that amount...". The "prescribed rules" are found in subsection 105(1) of the Regulations, which provides that "every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment".

It is our view that the requirement to withhold or deduct pursuant to paragraph 153(1)(g) of the Act and subsection 105(1) of the Regulations applies to payments for services rendered in Canada. Whether a payment to a non-resident person is a fee, commission or other amount for services rendered in Canada is a question of fact that can only be determined after an analysis of all of the relevant facts and circumstances, including all of the relevant agreements. In the situation described, if it is determined that the recruitment services provided by the UK corporation are rendered outside of Canada, payments made by a Canadian resident to the UK corporation for such services would not be subject to the withholding requirement under subsection 105(1) of the Regulations. However, as stated in paragraph 32 of Information Circular 75-6R2, Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada, if the services are rendered both inside and outside of Canada, a reasonable allocation of the payment will be required to determine the portion that will be subject to the withholding under section 105 of the Regulations.

We note that the withholding under section 105 of the Regulations does not represent a final tax of the non-resident. Rather, it is a payment on account of the non-resident's potential Part I tax liability to Canada. The ultimate tax liability is determined after the assessment of the non-resident's Canadian income tax return. Non-residents are normally required to file a Canadian income tax return to calculate their tax liability or to obtain a refund.

We would also draw your attention to paragraph 212(1)(d) of the Act which imposes a 25% withholding tax on certain payments made to non-resident persons as, on account or in lieu of payment of, or in satisfaction of, amongst other things, a payment described in subparagraph 212(1)(d)(iii) of the Act for services of an industrial, commercial or scientific character where the total amount payable as consideration for such services is dependent in whole or in part on:

• the use to be made of the services or the benefit to be derived from the services,
• production or sales of goods or services, or
• profits.

Whether a payment or any portion of a payment for recruitment services is an amount to which subparagraph 212(1)(d)(iii) of the Act applies is a question of fact having regard to all of the relevant facts and circumstances, including all of the relevant agreements. In this respect, we would refer you to Interpretation Bulletin IT-303, Know-How and Similar Payments to Non-Residents. A person who is a resident of the UK for the purposes of the Canada-UK Income Tax Convention may be eligible for relief from such Canadian withholding tax.

For more information about withholding from amounts paid to non-residents, please refer to Information Circular 75-6R2.

We trust the above comments are of assistance.

Yours truly,

Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch