30 April 2002 Internal T.I. 2002-0130827 - Insurance commissions paid to non-resident

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 the Canada-U.S. Tax Convention and subparagraph 212(1)(d)(iii) of the Income Tax Act to commissions earned by a non-resident insurance agent.

Position: Subparagraph 212(1)(d)(iii) does not apply. Commissions are subject to either Article VII or XIV of the Canada-U.S. Tax Convention.

Reasons: Commissions are paid in connection with the sale of property and amount to either business income or income in respect of independent personal services.

April 30, 2002

Ms. Colleen Wells Income Tax Rulings Directorate

International Audit International and Trusts Division
Calgary Tax Services Office International and Trusts Section
Éric Allard-Pouliot
(613) 957-2097

2002-013082

Technical Interpretation Request
Insurance commissions paid to non-residents

This is in reply to your memorandum of March 19, 2002, regarding the above-noted subject. More specifically, you have requested our opinion regarding the application of the Canada-U.S. Tax Convention (the "Convention") and subparagraph 212(1)(d)(iii) of the Income Tax Act (the "Act") to commissions earned by a non-resident insurance agent.

The facts, as provided in your request, are as follows:

(a) Until XXXXXXXXXX (the "Foreign Agent") was a resident of Canada;

(b) While he was a resident of Canada, the Foreign Agent acted as an insurance agent for XXXXXXXXXX and also trained other insurance agents;

(c) According to the Foreign Agent's T1 for the XXXXXXXXXX taxation year, he became a non-resident of Canada on XXXXXXXXXX and moved to the U.S. on that date as a result of his transfer to the U.S. office of XXXXXXXXXX;

(d) Since he moved to the U.S., the Foreign Agent has been paid commissions based on the commissions earned by the insurance agents that he trained while he was a resident of Canada (the "Commissions");

(e) For the part of the XXXXXXXXXX taxation year that the Foreign Agent was a non-resident of Canada, he received Commissions amounting to $XXXXXXXXXX, which were not reported on his T1 for that year;

(f) During the XXXXXXXXXX taxation year, the Foreign Agent has received $XXXXXXXXXX in Commissions. These Commissions were reported on a T4A-NR slip with 15% tax deducted. The Foreign Agent did not file a T1 for the XXXXXXXXXX taxation year.

Along with your request, you provided copies of the following contracts, which were entered into between the Foreign Agent and XXXXXXXXXX:

XXXXXXXXXX.

Having regards to these facts, you have requested our opinion as to whether subparagraph 212(1)(d)(iii) of the Act applies to the Commissions paid to the Foreign Agent since he became a non-resident of Canada and, if so, whether the Commissions fall under Article XXII of the Convention rather than Articles XIV or XII.

Here are our comments regarding each one of these concerns.

(a) Application of subparagraph 212(1)(d)(iii) of the Act

Pursuant to subparagraph 212(1)(d)(iii) of the Act, every non-resident person must pay an income tax of 25% on every amount that a person resident in Canada pays or credits to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, any payment for services of an industrial, commercial or scientific character performed by the non-resident person where the amount payable for those services is dependent, in whole or in part, on: (A) the use to be made of, or the benefit to be derived from, those services; (B) production or sales of goods or services; or (C) profits. However, subparagraph 212(1)(d)(iii) of the Act does not apply to payments that are made for services performed in connection with the sale of property or the negotiation of a contract.

In our view, the expression "services of [a] ... commercial ... character" is of a sufficiently wide import to include the services that were rendered by the Foreign Agent and for which the Commissions were paid. In this regard, the Tax Court of Canada mentioned in the case of Hasbro Canada Inc. v. The Queen, 98 DTC 2129 (T.C.C.) ("Hasbro"), that:

"... it is difficult to interpret that provision as applying only to payments for a particular category of services when the words used have definitely a wide import and are not qualified in any manner." (Page 2138)

It is also provided in paragraph 23 of Interpretation Bulletin IT-303 that "charges for product development and marketing know-how or research which vary in accordance with production or sales" may fall within subparagraph 212(1)(d)(iii) of the Act. In our view, both the Hasbro decision and IT-303 warrant a conclusion that the services performed by the Foreign Agent constitute services of a commercial character.

Since the Commissions appear to be based upon the sales of insurance policies by the agents that were trained by the Foreign Agent, they would also, in our view, meet the second condition for the application of subparagraph 212(1)(d)(iii) of the Act, i.e., that the payments be dependent, in whole or in part, on: (A) the use to be made of, or the benefit to be derived from, the services; (B) production or sales of goods or services; or (C) profits.

However, as previously mentioned, in order for the Commissions to be subject to subparagraph 212(1)(d)(iii) of the Act, they must not be paid for "services performed in connection with the sale of property". Given the breadth of the expression "in connection with" (see pages 2139-40 of the Hasbro decision and documents # E 30433 and E 9205377) and of the term "property" (some provisions of the Act, such as subsections 116(5.2) and 207.1(2), make it clear that a life insurance policy constitute a property for the purposes of the Act; see also documents # E 9300165, E 9310200 and E 950214A), we fail to see how the Commissions could be said not to be paid for "services performed in connection with the sale of property". Therefore, in our view, subparagraph 212(1)(d)(iii) of the Act does not apply in respect of the Commissions.

However, as will be shown hereafter, even if subparagraph 212(1)(d)(iii) of the Act could be said to apply in respect of the Commissions, in our view the application of the Convention would result in no withholding tax under Part XIII of the Act being applicable to the Commissions.

(b) Application of the Convention

Paragraph XXXXXXXXXX of the Basic Agreement provides the following:

"XXXXXXXXXX".

This paragraph, along with all the other provisions of XXXXXXXXXX of the Basic Agreement, is incorporated by reference into the XXXXXXXXXX.

Similar wordings can be found in the XXXXXXXXXX. Paragraph XXXXXXXXXX provides the following:

"XXXXXXXXXX".

As for paragraph XXXXXXXXXX, it reads as follows:

"XXXXXXXXXX".

It appears therefore that up until XXXXXXXXXX, the Foreign Agent was not an employee of any of the XXXXXXXXXX but rather an independent contractor. It is not clear whether this status changed on XXXXXXXXXX , as a result of the Addendum, which provides that "XXXXXXXXXX". However, since this is the only change brought to Paragraph XXXXXXXXXX of the Basic Agreement pursuant to the Addendum, we would be inclined to still consider the Foreign Agent as an independent contractor even after XXXXXXXXXX. The fact that the Commissions were reported on a T4A-NR and were subject to a 15% withholding pursuant to subsection 105(1) of the Income Tax Regulations (the "Regulations") supports such a conclusion. Pursuant to this provision, every person paying a commission to a non-resident person in respect of services rendered in Canada must deduct 15% of such payment. However, subsection 105(2) of the Regulations provides that subsection 105(1) does not apply to payments that fall within the definition of "remuneration" in subsection 100(1) of the Regulations, i.e., salary, wages or commissions paid to an officer or employee.

Based on the assumption that the Commissions were earned by the Foreign Agent as an independent contractor, regards must be had to subsection 2(3) of the Act and to Articles VII and XIV of the Convention, which deal with business profits and income derived in respect of independent personal services.

Paragraph 2(3)(b) of the Act provides that a non-resident of Canada who carries on business in Canada at any time in a year or a previous year is liable for tax under Part I on his taxable income earned in Canada for that year determined in accordance with Division D of the Act (section 115 and followings; with respect to non-residents, an extended meaning of "carrying on business in Canada" is provided under section 253 of the Act). However, Canada's right to tax non-residents who carry on business in Canada is subject to the Convention.

Pursuant to Article VII of the Convention, the business profits of a resident of the U.S. are taxable only in the U.S. unless the resident carries on business in Canada through a permanent establishment (a "PE") situated therein. If the U.S. resident carries on, or has carried on, business in Canada through a PE, then the business profits that are attributable to that PE may be taxed in Canada. Similarly, Article XIV of the Convention provides that the income derived by a U.S. resident in respect of independent personal services are solely taxable in the U.S. unless the U.S. resident has or had a fixed base (a "FB") regularly available to him in Canada. If so, then the income that is attributable to that FB may be taxed in Canada. It is to be noted that the reference to a prior PE or FB in Articles VII and XIV of the Convention ensures that Canada has the right to tax income attributable to a PE or FB in Canada even if there is a delay between the termination of the PE or FB and the receipt or accrual of such income (see the 1984 Technical Explanations regarding Articles VII and XIV of the Convention).

However, the fact that a U.S. resident earns business profits or derives income in respect of independent personal services that are not attributable to a PE or FB in Canada, as the case may be, does not necessarily mean that such profits or income are exempt from tax in Canada. Pursuant to subsection 805(1) of the Regulations, a non-resident person who carries on business in Canada is taxable under Part XIII of the Act on all amounts otherwise taxable under that Part, except those amounts that may reasonably be attributed to the business carried on by him through a PE in Canada. Therefore, where the income is earned by a business, but not earned through a PE situated in Canada, it remains subject to Part XIII tax. However, pursuant to the Convention, Canada's right to tax such business income not attributable to a PE in Canada is restricted to income from dividends, interest and royalties (see Articles X(8), XI(5) and XII(5) of the Convention).

Only Article XII of the Convention, which applies with respect to royalties, could be of any relevance in the present file. For the purposes of the Convention, the term "royalties" is defined in Article XII(4) as follows:

"4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work [...], any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, tangible personal property or for information concerning industrial, commercial or scientific experience [...]"

In our view, the Commissions cannot be said to constitute royalties for the purposes of the Convention. In this regard, it is to be noted that even if the Commissions could be considered as being subject to subparagraph 212(1)(d)(iii) of the Act as you suggested in your request, they would still not qualify as "royalties" for the purposes of the Convention since payments for services do not come within the definition of that term as contained in Article XII(4) of the Convention (see documents # E 50278, E 9306027 and E 2000-0048107).

In your memorandum you requested our opinion as to whether the Commissions could fall under Article XXII of the Convention. This Article only applies with respect to items of income not otherwise dealt with in the prior Articles of the Convention and, as provided in paragraph 1 of the OECD Commentary on Article 21 of the Model Tax Convention on Income and on Capital, "[T]he income concerned is not only income of a class not expressly dealt with but also income from sources not expressly mentioned." Having concluded that the Commissions fall under either Article VII or XIV of the Convention, it follows that Article XXII is of no application with respect to the Commissions.

It flows therefrom that the Commissions earned by the Foreign Agent since he became a resident of the U.S. may be taxable in Canada only to the extent that they are attributable to a PE or FB, as the case may be, that the Foreign Agent has or had in Canada. Although we do not have sufficient information to reach a conclusion in this regard, in our view this condition would be met if the Foreign Agent, since becoming a non-resident of Canada, has provided no further services to the insurance agents that were trained by him while he was a resident of Canada. Hence, the profits or income could be said to be attributable to the PE or FB that he had in Canada at the time during which the insurance agents were trained.

Conclusion

In light of the foregoing, we are of the view that subparagraph 212(1)(d)(iii) of the Act does not apply with respect to the Commissions paid to the Foreign Agent and that the Commissions are not subject to Articles XII or XXII of the Convention but rather to either Article VII or XIV. As a result, the Commissions would be taxable in Canada only to the extent that they are attributable to a PE or FB that the Foreign Agent has or had in Canada.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Céline Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the client.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate