12 June 1990 Internal T.I. 59339 F - Fees Paid to Non-residents

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.

June 12, 1990

Dear Sirs:

Re: Interpretation Bulletin IT-468R and Information Circular 75-6R

This is in reply to your letter dated December 28, 1989.  

The interrelation ship of Part XIII and Part I of the Income Tax Act in respect of payments to non-residents that may be covered by Part XIII and are also business income of the non-resident is addressed by Income Tax Regulation 805. 

Income Tax Regulation 805 provides as follows:

     "805(1)   Every non-resident person who carries on business in Canada shall be taxable under Part XIII of the Act on all amounts  otherwise taxable under that Part except those amounts that

     (a)  may reasonably be attributed to the business carried on by him through a permanent establishment (within the meaning assigned by subsection 400(2) or that would be assigned by that subsection if he were a corporation) in Canada; or

     (b)  are required by subparagraph 115(l)(a)(iii.3) of the Act to be included in computing his taxable income earned in the year in Canada.

     (2)  Where the Minister is satisfied that under subsection (1) an amount is not taxable under Part XIII of the Act, he may permit payment to be made to the non-resident person without any deduction being made under section 215 of the Act.

     (3)  Subsections (1) and (2) do not apply in respect of amounts upon which tax under Part XIII of the Act is payable in a relevant taxation year by a taxpayer required by section 801 to file the return described in that section in respect of that year."

In circumstances where Part XIII does not apply, e.g. where payments to the non-resident are not "otherwise taxable under that Part" (perhaps because of the application of subsection 212(4) of the Income Tax Act), Income Tax Regulation 805, by its terms, does not apply.  However, in such circumstances or where the Minister has granted a waiver under paragraph (2) of the Income Tax Regulation 805 (perhaps because of being satisfied that the amounts are attributed to a permanent establishment in Canada), Income Tax Regulation 105, enacted in respect of paragraph 153(1)(g) of the Income Tax Act, may apply.  Income Tax Regulation 105 provides as follows:

     "105(1)  Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 percent of such payment.

     (2)  Subsection (1) does not apply to a payment described in the definition "remuneration" in subsection 100(1)."

In our view Part I of the Income Tax Act does apply to non-residents who do not have a permanent establishment in Canada.  It is also our opinion that subsection 153(1) applies irrespective of whether the non-resident payee has a permanent establishment in Canada.  However, you will note that Regulation 105 only applies in respect of fees, etc. paid "in respect of services rendered in Canada."

Under some of Canada's tax treaties respecting the avoidance of double taxation, including the Canada-U.S. 1980 Tax Convention, management fees are covered by the article of the treaty respecting business profits and pursuant thereto business profits of a non-resident enterprise are generally exempt from Canadian tax unless they are attributable to a permanent establishment in Canada through which the non-resident carries on business in Canada. However, Canada generally does not agree under the tax treaties to which it is party not to require withholding on account of possible Canadian tax liability pending a determination of the applicability of any exemption under the treaty.  The withholding required under paragraph 153(1)(g) of the Income Tax Act and related Income Tax Regulation 105 is not a definitive tax but only a payment on account of potential liability.

The non-resident payee of fees in respect of which withholdings have been made pursuant to Income Tax Regulation 305 may be entitled to a refund of the amounts withheld by virtue of an exemption granted by the tax treaty between Canada and the country in which the payee is resident, if there is such a treaty.  In order to apply for such a refund a tax return must be filed by the non-resident in accordance with Part I of the Income Tax Act together with appropriate evidence supporting the non-resident's claim for exemption pursuant to treaty.

In certain cases, pursuant to subsection 153(1), the Department may grant a waiver or reduction of the withholding otherwise required under subsection 153(1).  We refer you to paragraphs 10 - 20 of Information Circular No. 75-6R in this regard.  You will see that applications for waivers and reductions should be made to the Chief of Source Deductions at the District Taxation Office.

We trust the foregoing is of assistance.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch