23 March 2010 External T.I. 2010-0356621E5 - Costa Rican Withholding Tax

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 withholding taxes exigible under Costa Rican laws constitute an income or profits tax for the purposes of section 126.

Position: No.

Reasons: The Costa Rican withholding taxes are not imposed if a credit is not available to the person in the residence state. Therefore, the withholding taxes are not an income or profits tax pursuant to subsection 126(4).

2010-035662
XXXXXXXXXX J. MacGillivray
(613) 957-2103
March 23, 2010

Dear Sir:

Re: Technical Interpretation Request - Income or Profits Tax

We are writing in response to your e-mail correspondence of February 8, 2010, in which you requested our comments on the interpretation of subsection 126(4) of the Income Tax Act (Canada) R.S.C. 1985 c. 1 (5th Supplement) (the "Act") with respect to withholding taxes imposed in accordance with the laws of Costa Rica from a payment made to a partnership that is a "Canadian partnership", as defined in subsection 102(1) of the Act.

You have described a situation in which the partnership rendered services to an entity that is not resident in Canada for the purposes of the Act. The entity owes an amount to the partnership as consideration for those services. Under the tax laws of Costa Rica, you advise that the payment of the amount would be subject to a withholding tax of 25%, unless the tax is not deductible as a foreign tax credit pursuant to section 126 of the Act in the computation of the tax liability of the members of the partnership. You have asked us to confirm whether the withholding tax would be considered an income or profits tax for the purposes of section 126.

Our Comments

Please note that it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular can be accessed on the Canada Revenue Agency's website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments, which we trust will be of some assistance.

Section 126 of the Act makes a foreign tax credit available to a taxpayer who is resident in Canada at any time in a taxation year. A foreign tax credit is a deduction from the taxpayer's Canadian tax otherwise payable for a taxation year under Part I of the Act in respect of income or profits taxes paid to a government of a country other than Canada by the taxpayer for the year. Pursuant to subsection 126(4) of the Act, an income or profits tax paid by a person resident in Canada to the government of a country other than Canada does not include a tax, or a portion of a tax, imposed by that government that would not be imposed if the person were not entitled under section 113 or section 126 to a deduction in respect of the tax or that portion of the tax.

In our view, subsection 126(4) of the Act will apply to exclude the withholding tax you described from the meaning of the term "income or profits tax" for all purposes of the Act. Accordingly, such withholding tax would not qualify as a "non-business income tax" or a "business income tax", as those terms are defined in subsection 126(7), with the result that the members of the partnership would not be able to claim a foreign tax credit in respect of the withholding tax under section 126.

Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC-70-6R5.

Yours truly,

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