7 October 2003 External T.I. 2003-0041465 - Application of Reg. 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Application of regulation 105 where non-resident seller has goods fire-proofed in Canada by a Canadian service provider prior to goods being delivered to final (Canadian) customer.

Position: Regulation 105 might apply in the circumstances. It will depend on the contract. General comments given as this is a specific, completed transaction.

Reasons: n/a

XXXXXXXXXX 		2003-002718
									Eliza Erskine
October 7, 2003

Dear XXXXXXXXXX:

Re: Application of Regulation 105 to Non-Resident Seller

This is in reply to your facsimile received in our Directorate on September 30, 2003. We understand that your client is an English business ("UKCo") that has sold goods to a Canadian company ("Canco"). After importation into Canada, but prior to final delivery, UKCo has arranged to have the goods fire-proofed by a second Canadian company ("FireCo") pursuant to the purchase contract with Canco as part of the purchase price for the goods. Canco informed UKCo that UKCo might be subject to the 15% withholding tax required under section 105 of the Income Tax Regulations ("Regulation 105"). You have requested a written opinion as to whether this is correct. It is your understanding that Regulation 105 would not apply to UKCo in this situation.

Our Comments

The circumstances outlined in your letter relate to a specific transaction involving a particular taxpayer. We note that written confirmation of the tax implications arising out of a particular fact situation are given by this Directorate only where the circumstances or events are the subject matter of an advance income tax ruling request. Please consult the current version of Information Circular IC 70-6, Advance Income Tax Rulings, which can be found on the Canada Customs and Revenue Agency website at www.ccra-adrc.gc.ca for information regarding obtaining an advance income tax ruling. Although we cannot give you a detailed response to your question, we can offer the following general comments, which may be helpful to you.

Regulation 105 applies where a person resident in Canada pays a non-resident person a fee, commission or other amount in respect of services rendered in Canada. Where Regulation 105 applies, the person resident in Canada must withhold and remit to the Canada Customs and Revenue Agency (the CCRA) 15% of the fee, commission or other amount paid to the non-resident person. In the situation described in your letter, it is possible that the payment made by Canco to UKCo is made up solely of the purchase price of the goods, in which case Regulation 105 would not apply. However, depending on the terms of the contract, it is also possible that part of the purchase price is actually a payment by Canco to UKCo for the service of fireproofing the goods. Where the contract shows that Canco was actually responsible for the cost of fireproofing the goods prior to delivery and that it paid UKCo to perform this service, and UKCo performed this service by sub-contracting out the work to FireCo, then there is an argument, based on the very broad interpretation of "in respect of" taken by Canadian courts, that part of the purchase price was actually a payment "in respect of" services rendered in Canada and subject to the 15% Regulation 105 withholding tax. We note that Regulation 105 does not state that the services must be rendered in Canada by the non-resident. Rather, it states that the payment to the non-resident must be in respect of services rendered in Canada. This distinction was highlighted in the decision of the Tax Court of Canada in Ogden Palladium v. The Queen, which was affirmed by the Federal Court of Appeal ([2003] 1 CTC 206; 2002 DTC 7378).

If you wish to discuss the details of UKCo's sale of goods into Canada with respect to whether Regulation 105 might apply, we suggest that you contact the International Tax Services Office, Non-Resident Withholding Accounts Division, at 1-800-267-3395 or (613) 952-2344. As your client may require a Regulation 105 waiver in the circumstances described in your letter, we include with this letter a copy of Form R105, Regulation 105 Waiver Application, which we note can be obtained from our website referred to above. If you have questions regarding the waiver application process and policies, we suggest that you contact the Non-Resident Operations Division of the International Tax Directorate at (613) 957-7199.

We hope that our comments will be of assistance.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
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