5 December 1985 Income Tax Severed Letter

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.

DEC 5 1985

TORONTO DISTRICT OFFICE W. Petrash Chief of Verification and Collections E. Latourell

HEAD OFFICE Reorganisation and Non-Resident Division D.S. Delorey 995-2455 This is in reply to your memorandum of October 18, 1985.

XXXX

Because of this sharing of net profits, it is your view that a partnership XXXX in fact :as defined under subsection 96(1.1) of the Act". Thus, you state that this partnership is subject to non-resident withholding tax under paragraph 212(13.1)(b) of the Act. Also, you feel that regulation 105 of the Income Tax Regulations is not applicable to the share of profits paid to the various non-residents in the years following the year (1979) in which the services were performed. Our comments follow.

Partnership Existence

Your reference to subsection 96().1) of the Act as a provision which defines a partnership is puzzling. That subsection simply deals with the allocation of the income of a partnership to a former partner. Thus a partnership must in fact exist before the provisions of that subsection are applicable.

While the sharing of profits is one indication that a partnership exists, it is our view that other attributes of a partnership must exist before the relationship between two or more persons can be said to be that of partners in a partnership. For example, in the absence of an agreement limiting a partner's liability, the partners will normally

(a) share in the losses of the partnership,

(b) have joint unlimited liability with respect to any debts or other obligations of the partnership, and

(c) have an agency relationship whereby the acts of every partner, who acts within the partner's ostensible authority, binds the firm and its partners.

From a reading of the contracts submitted for our review, none of these other attributes appear to exist. Because of this, it is our view that the relationship which exists between the parties who share in the net profits of the producer is not one of partners in a partnership.

Paragraph 212(13.1)(b)

The reason for your reference to this paragraph is not clear. Certainly, it does not provide authority for subjecting a distribution of partnership income to Part XIII tax. It simply subjects to Part XIII tax an amount that would be subject to tax under that part if paid to a non-resident person. The deeming provision was necessary because a partnership is not a person.

Regulation 105

With respect to your comments on Regulation 105 as mentioned above, it is our view that the provisions of regulation 105 are applicable to amounts paid in a year subsequent to that In which the services are rendered.

Part I or Part XIII

The guaranteed minimum fee paid to each of the actor's company and the director's company are subject to tax under Part I of the Act unless exempted by virtue of Article I of the 1942 U.F. Treaty. They will be so exempt if neither of those companies have a permanent establishment in Canada. The provisions of Regulation 105 are applicable to these fees, to the extent that they relate to services rendered in Canada, regardless of the year in which the fees are paid.

With respect to the share-of-net-profits payments, it is our view that these payments are subject to Part XIII tax pursuant to subsection 2)2(5) of the Act. They are not, in our view, exempt under either Article XXX of the 1942 U.S. Treaty or part 3 of Article XII of the 1980 U.S. Treaty in that they are in respect of a motion picture film.

Wm. R. McColm

for Director Reorganization and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. T.G. McIntyre Non-Resident Project Team Accounting & Collections Division DSD/hm 96(1.1) Reg. 105 212(5) Article XIIIC - "old" U.S. Treaty 212(13.1) Article XII - "new" U.S. Treaty