7 September 1990 Income Tax Severed Letter - Whether a non-resident individual would need to file a Canadian income tax return

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.

Dear Sirs:

This is in reply to your letter to Revenue Canada, Customs and Excise dated December 19, 1989 insofar as it relates to your inquiry as to whether your client XXX would need to file a Canadian income tax return.

We have reviewed your letter of December 19, 1989 as well as the information provided by the XXX with its letter to Revenue Canada, Customs and Excise dated January 25, 1989.

We cannot provide you with a definitive opinion as to whether the XXX must file a Canadian income tax return as this can generally only be determined retrospectively having regard to all relevant facts. However, we can advise that based upon the information that we have reviewed it would appear to us that XXX.

Generally, the Canadian income tax treatment in respect of amounts paid to non-residents for the rights to use property, including computer software, is different from the treatment in respect of amounts paid for services rendered or to be rendered by non-residents, unless the amounts paid for the right to use the computer software are attributable to a business carried on by the non-resident through a permanent establishment situated in Canada. Accordingly, it will likely be necessary to determine the appropriate allocation of the amounts to be paid as between that part is paid as consideration for the right to use computer software and that part that is paid as consideration for services.

Generally, amounts paid to a non-resident as consideration for the right to use computer software are subject to Canadian income tax at the rate of 25% of the gross amount of such payments pursuant to Part XIII of the Income Tax Act unless such amounts are attributable to a business carried on by the non-resident through a permanent establishment situated in Canada. The rate of such tax payable by residents of the United States may be reduced to 10% by virtue of Article XII of the Canada-United States Income Tax Convention, 1980 (the "Treaty"). No deductions are permitted in determining the amount of income that is subject to this tax, e.g. it is the gross amount paid to the non-resident as consideration for the right to use computer software that is subjected to tax at the applicable rate without regard to expenses of any kind incurred by the non-resident. The Canadian payor is required to withhold the tax from payments made to the non-resident and remit such withholdings to Revenue Canada, Taxation on account of the non-resident's Canadian tax liability.

Generally, amounts paid by Canadians to a non-resident for services rendered or to be rendered by the non-resident are considered to be business income of the non-resident. While we do not have sufficient information to permit us to express a definitive opinion. XXX. Non-residents are subject to Canadian tax on their net income from business carried on in Canada and must file an income tax return in respect of each taxation year in which they carried on business in Canada. Residents of the United States may be entitled to an exemption from Canadian income tax (but not the obligation to file Canadian income tax returns) in respect of their Canadian business income by virtue of Article VII of the Treaty if such business income is not attributable to a permanent establishment situated in Canada.

By virtue of Regulation 105 enacted pursuant to the Income Tax Act, every person making a payment to a non-resident for services rendered in Canada must withhold from such payment 15% thereof and remit such withholding to Revenue Canada, Taxation on account of the non-resident's potential Canadian tax liability. Where an amount is paid to a non-resident in part as consideration for services rendered in Canada and in part as consideration for services rendered outside Canada it is necessary to make an allocation of the amount as between in the two in order to determine the amount required to be withheld under Income Tax Regulation 105. The non-resident may be entitled to a refund of the amount withheld under Regulation 105 by virtue of Article VII of the Treaty. The non-resident's application for such a refund is made by and as part of the Canadian income tax return for the taxation year in respect of which the withholding was made.

For further information regarding specific aspects of the obligations of the XXX under the Income Tax Act, we recommend that you consult with the Revenue Canada, Taxation District Taxation Office for the district in which the XXX will be operating.

The opinions expressed herein are not advance income tax rulings and, in accordance with paragraph 24 of Information Circular 70- 6R dated December 18, 1978, are not considered binding on the Department.