27 June 1979 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.

June 27, 1979

Director, General, Corporate Rulings Revenue Canada, Taxation, 875 Heron Road, Ottawa, Ontario K1A 9L8

Dear Sir:

Re: Management Fees Canada-U.K. Tax Treaty

We are writing to request your opinion on whether or not the Canada-U.K. Tax Treaty would exempt the payment of management fees from Part XIII withholding taxes. In the Canada-United States Tax Treaty, Article II specifies that management charges are not included in "industrial and commercial profits" and are to be taxed separately; however, neither the new nor the present Canada-U.K. Tax Treaties specify such an exclusion.

The following is a normal fact pattern that we would like to consider:

1. Parent is a taxable Canadian corporation.

2. Forsub is a 100% owned controlled foreign affiliate of Parent, and is a resident in the United Kingdom.

3. Forsub has no permanent establishment in Canada and is a United Kingdom enterprise.

4. Under a management contract, Parent agrees to pay Forsub a fee for services rendered outside of Canada in managing other foreign affiliates of Parent. The fee is a reimbursement for reasonable specific costs incurred by Forsub on the Parent's behalf plus a reasonable mark-up.

5. Forsub carries on an active business in the United Kingdom.

The fees to Forsub would appear to be a normal part of the commercial profit from carrying on a business. Article 6(6) of the present Canada-U.K. Tax Treaty reads as follows:

"(6) The term "industrial or commercial profits" means income derived by an enterprise from the conduct of a trade or business, including income derived by an enterprise from the furnishing of services of employees or other personnel, ...; nor does the term include remuneration for personal (including professional) services".

More specifically, our question is whether you consider that the final part of Article 6(6) of the present treaty would exclude these fees from industrial or commercial profits and thereby exclude them from exemption from Canadian taxes?

Under Article VII of the new Canada-U.K. Tax Treaty, the fees would appear to be profits of a U.K. enterprise. Article VII(7) reads:

"7. Where profits include items of income which are dealt with separately in other Articles of this Convention, the provisions of this Article shall not prevent the application of the provisions of those other Articles with respect to the taxation of such items of income."

More specifically, our question is whether you consider that the fee is dealt with in other Articles of the new treaty so as to make the profit subject to Canadian withholding tax (Paragraph 212(1)(a) after Subsection 212(4))?

Article 2(2) of the present treaty and Article III(2) of the new treaty apply the meaning of terms under the laws of the contracting state where they are not defined in the treaty. This does not appear to cause management fees to be excluded from the definition of profits in the treaties.

A related question is the application of the treaty on the income of Forsub, which would appear to be deemed by Paragraph 95(2)(b) to be income from a business other than an active business. Our question is whether or not the foreign accrual property income (Paragraph 95(1)(b)) would be exempt from taxation under the present Canada-U.K. Treaty?

Please contact the writer if further clarification of the questions is necessary.

Yours very truly,

XXXX