Words and Phrases - "retainer"

In 1998 the Canadian taxpayer paid $14.3 million to non-resident service providers in the ordinary course of its forestry business. The Minister assessed it for failure to withhold under Reg. 105 on the following payments:

1. the portion of service fees allocated to services rendered outside of Canada according to estimates made by the service provider (with no supporting documentation being provided by them for such estimates);
2. reimbursements of non-residents' out-of-pocket costs and related items, including travel time and expenses; and
3. amounts paid as retainers in relation to services which the service provider expected to be rendered outside of Canada (again, without documentary support).

Bowie J. found (at paras. 6-10) that the purpose of the withholding obligations under s. 153(1)(g) and Reg. 105 was to ensure that, if a non-resident recipient of a payment is, after all the facts are known (i.e. when its annual Canadian tax returns are filed), liable to pay income tax in Canada, there will be funds available, in the form of the 15% withheld and remitted, to satisfy the obligation. He implicitly accepted that disbursements incurred by a non-resident service provider in providing its services might be “in respect of” those services. However, disbursements were not subject to Reg. 105 withholding since they are not “for” the non-resident's services, indicating (at para. 10) that the Reg. 105 wording may "properly be read as including only amounts that may be taxable in Canada in the hands of the recipient, which is to say 'income earned in Canada'." He stated (at para. 7):

[T]he appellant's obligation in respect of the disbursements is simply to repay that which the consultant has paid on the appellant's behalf in the course of rendering the service. To withhold 15% from that amount would not at all further the purpose of paragraph 153(1)(g)… . It is not difficult to foresee that if foreign service providers were to be reimbursed their expenses only to the extent of 85% until such time as they had filed a Canadian income tax return after the year end, and then waited for an assessment and a refund, that would create a considerable disincentive for them to offer their services to Canadian clients

As the expression “a fee, commission or other amount in respect of services rendered in Canada of any nature whatever” in Reg. 105 was capable of being narrowly interpreted so as to conform with what was authorized by ITA s. 153(1)(g), Reg. 105 was intra vires.

Respecting the lack of documentary support for the Canada/U.S. allocation estimates of the non-resident service providers, he stated (at para. 24, see also para. 27) that "there is no requirement at law that those be provided." A "retainer" was in reality a deposit so that it was "not a fee and not referable to any work" (para. 26). Finally, charges for time spent travelling to Canada for meetings were "not earned in Canada, and so [not] taxable in Canada" (para. 28).