2010 Ruling 2010-0377501R3 - Regulation 105

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 Regulation 105 Withholdings are Required

Position: No.

Reasons: No payments will be made to a non-resident in respect of services rendered in Canada.

XXXXXXXXXX
									2010-037750
									XXXXXXXXXX 

XXXXXXXXXX , 2010 

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("Buildco")
XXXXXXXXXX ("Canco")

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge and that of the taxpayers, none of the issues involved in this request for an advance income tax ruling are:

(i) dealt with in earlier returns of the taxpayers or a person related to either of the taxpayers;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by the taxpayers or a person related to either of the taxpayers;
(iii) under objection by the taxpayers or by a person related to either of the taxpayers; or
(iv) before the courts.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1, (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The ruling given herein is based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter, the following terms have the meanings specified below:

"Buildco" means XXXXXXXXXX ;

"Buildco 2" means XXXXXXXXXX ;

"Buildco USA" means XXXXXXXXXX ;

"Canco" means XXXXXXXXXX ;

"Contractors" mean Buildco and Buildco 2;

"Construction Agreements" means the Construction Management-At-Risk and General Contractor Agreements entered into by Buildco USA, Buildco, Buildco 2 and Canco;

"CRA" means the Canada Revenue Agency;

"Guaranteed Obligations" means the obligations of the Contractors to Canco under the Construction Agreement that are the subject of the Performance Guarantee;

"Letter Agreements" are the agreements which govern the provision of early-works services provided by Buildco USA and Buildco 2 to Canco (predominantly related to estimation and procurement advice);

"non-resident" has the meaning assigned by subsection 248(1) of the Act;

"Performance Guarantee" is the guarantee provided by Buildco USA to Canco, as described in paragraph 6 herein;

"Regulations" means the Income Tax Regulations;

"Regulation 105" means section 105 of the Regulations;

"Secondment Agreement" is the agreement between Buildco, Buildco USA and an employee of Buildco USA under which the employee will perform work for Buildco in furtherance of Buildco's obligations under the Construction Agreements;

"Subcontractor Contracts" are contractual arrangements that will be entered into by the Contractors with subcontractors under which the subcontractors will assist the Contractors in fulfilling their obligations under the Construction Agreements;
"the Services" are the duties relating to the management and general contractor services required to complete the construction of the XXXXXXXXXX as required under the terms of the Construction Agreements;
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions are as follows:

Facts

1. Buildco is a taxable Canadian corporation governed by the laws of XXXXXXXXXX . All of the issued and outstanding shares of Buildco are legally and beneficially owned by Buildco USA.

2. Buildco USA is a non-resident corporation governed by the laws of the state of XXXXXXXXXX .

3. Buildco 2 is a taxable Canadian corporation governed by the laws of the province of XXXXXXXXXX . Buildco 2 provides clients with integrated construction, architectural and engineering services and solutions.

4. Canco is a taxable Canadian corporation and a public corporation governed by the Bank Act (Canada). Canco's shares are widely-held and are listed for trading on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

5. Buildco USA and Buildco 2 submitted a proposal to be the construction manager-at-risk/general contractor in respect of the construction of XXXXXXXXXX for Canco. XXXXXXXXXX . Their joint-proposal was accepted by Canco. At that time, Buildco USA and Buildco 2 entered into the Letter Agreements with Canco.

6. In the course of negotiating the Contractor Agreements relating to XXXXXXXXXX , Buildco USA advised Canco that Buildco and Buildco 2 would be the contracting parties and would be the legal entities responsible for carrying out the construction manager-at-risk/general contractor duties. In order to provide performance assurance to Canco, Buildco USA agreed that it would be a signatory to each of the agreements for the purpose of guaranteeing the performance by the Contractors ("Performance Guarantee").

7. The Letter Agreements were terminated upon execution of the Construction Agreements. The Construction Agreements govern the provision of the Services.

8. All amounts payable to Buildco USA pursuant to the Letter Agreements will be paid to Buildco USA and an appropriate withholding made pursuant to paragraph 153(1)(g) of the Act and Regulation 105.

9. Separate Construction Agreements exist for each of the XXXXXXXXXX . Pursuant to the terms of each of the Construction Agreements:

(a) The Contractors agree to provide all of the Services required to complete the construction of the XXXXXXXXXX .

(b) Canco agrees to pay to the Contractors a fee for the provision of the Services.

(c) Canco agrees to reimburse the Contractors for certain agreed-upon out of pocket costs (including certain agreed-upon subcontractor costs) incurred by the Contractors in the course of providing the construction management and general contractor services.

(d) Buildco USA agrees to indemnify and hold Canco harmless (the "indemnity") from and against any and all claims directly or indirectly arising out of a breach of the Construction Agreements or any negligent act, error or omission of the Contractors. Canco will not pay any amount to Buildco USA in respect of the indemnity.

(e) Buildco USA agrees to ensure, as part of its Performance Guarantee:

(i) the due and punctual payment, observance and performance of the Guaranteed Obligations by the Contractors to Canco; and

(ii) the Guaranteed Obligations will be paid, observed or performed, as the case may be, strictly in accordance with the terms of the Construction Agreement.

(f) Canco has the right to demand that Buildco USA observe or perform the Guaranteed Obligations if a default by the Contractor in respect of the Guaranteed Obligations occurs. If such a demand is made, Buildco USA will be entitled to the rights of, and will be subject to the responsibilities of, the Contractor under the Construction Agreement.

10. Canco will not pay any amount to Buildco USA in respect of the Performance Guarantee.

Proposed Transactions

11. The Contractors will enter into the Subcontractor Contracts with subcontractors who will agree to perform specific tasks required under the Construction Agreement. The Contractors will be directly responsible for compensating subcontractors pursuant to the Subcontractor Contracts. The Contractors anticipate that the vast majority of the subcontractors will be resident in Canada. If any Subcontractors are non-residents, the Contractors will ensure that all Canadian reporting and withholding obligations in respect of any payments are satisfied. While Canco will reimburse the Contractors for the compensation of the Subcontractors (see 9(c) above), Canco will not be responsible for the Canadian remitting and withholding obligations.

12. Buildco will employ full-time and part-time personnel, as required, to attain a staffing level sufficient to provide the Services. These employees will be residents of Canada or, to the extent necessary, will be "seconded" from Buildco USA.

13. Having regard to any secondment, Buildco, Buildco USA and an employee of Buildco USA will enter into a Secondment Agreement. In accordance with IC 75-6R2 "Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada", each Secondment Agreement will:

(a) be in writing and signed by Buildco USA, Buildco and the seconded employee;

(b) specify the legal terms of the secondment;

(c) provide that Buildco is responsible for the costs associated with the seconded employee's salary and benefits such as medical, pension, and possible tax payments, and any costs of the transfer including travel and relocation;

(d) clearly state that there is no element of profit included in the charge-back to Buildco by Buildco USA; and

(e) provide that Buildco is responsible for all Canadian reporting and withholding obligations on the portion of the seconded employee's wages sourced to Canada.

14. Canco will make payments to the Contractors under the terms of the Construction Agreements. The Contractors will be the legal and beneficial owners of all payments received from Canco as compensation for the Services as well as the reimbursements for the subcontractor costs. That is, the Contractors will receive payments from Canco for their respective own use and enjoyment and will assume the risk and control of the payments received.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to establish the Contractors as the construction manager-at-risk/general contractor for Canco in respect of the Construction Agreements and as the beneficial owner of any payments provided under those agreements.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. Regulation 105 will not apply to require Canco to withhold any portion of a payment made to the Contractors in respect of the Services rendered by the Contractors to Canco in accordance with the Construction Agreements nor will it apply to the reimbursements pertaining to the subcontractors.

Caveat

The above noted ruling is based on the Act and the Regulations in their present form and does not take into account any proposed amendments to the Act or the Regulations which, if enacted, could have an effect on the ruling provided herein. This ruling is based solely on the facts and proposed transactions described above and is subject to the limitations and qualifications set forth in IC 70-6R5 "Advance Income Tax Rulings" issued on May 17, 2002. This ruling is binding on the CRA provided that the proposed transactions are completed on or before XXXXXXXXXX .

Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above. More specifically, the CRA has not reviewed and is not providing a ruling on the tax implications of any payments made by Canco following any default in respect of the Guaranteed Obligations.
Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch