14 June 1993 External T.I. 9317060 F - 1250-3 Withholding Tax on Resource Royalties

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.

CANADIAN RESOURCE ROYALTIES - NON-RESIDENT WITHHOLDING TAX

QUESTION 27

Royalties earned by non-residents from Canadian resource properties are subject to a 25% withholding tax pursuant to paragraph 212(1)(d). In the case of many income tax treaties, including the Canada-U.S. Income Tax Convention (1980) this rate is not reduced. Is a Canadian payer of royalties (e.g a "production royalty" as defined in section 1206 of the Regulations) required to withhold Part XIII tax on the basis of the cash royalties or on the basis of the gross royalties before the deduction of mineral tax or other Crown charges paid by the recipient in respect of such royalties?

If a non-resident has working interests in oil and gas wells which represent permanent establishments (PEs) in Canada through which he carries on business, the income derived from such working interests represents business income subject to tax under Part I rather than Part XIII pursuant to Section 805 of the Regulations. If the same non- resident also has resource royalty income from Canada, may he choose to include such royalty income in computing his business income under Part I? If so, is the payer relieved of any obligation to withhold under 212(1)(d) in those circumstances?

DEPARTMENT'S POSITION

Pursuant to paragraph 212(1)(d) and subsection 214(1), the gross amount of a royalty in respect of a Canadian resource property paid or credited by a person resident in Canada to a non-resident, before any deduction in respect of Crown charges which are required to be borne by the non-resident is subject to Part XIII withholding tax.

In any case where, in the year, a non-resident person carried on a business in Canada described in any of subparagraphs 66(15)(h)(i) to (vii), all amounts in respect of a Canadian resource property that would be required to be included in computing his income under Part I if he were resident in Canada at any time in the year would be included in computing his income under Part I pursuant to subparagraph 115(1)(a)(iii.3) to the extent it would not have otherwise been so included. In the circumstances described in this question, the resource royalties not attributable to the business carried on in Canada by the non-resident would be included in computing income his under Part I by virtue of subparagraph 115(1)(a)(iii.3). Paragraph 805(1)(b) of the Regulations provides that amounts required by subparagraph 115(1)(a)(iii.3) to be included in computing taxable income earned in the year in Canada are not taxable under Part XIII. However, the payer is not relieved of his obligation to withhold under paragraph 212(1)(d) from such royalties unless the non-resident has obtained a waiver from the Minister pursuant to subsection 805(2) of the Regulations.