Responses Prepared by International Tax Directorate
May 13, 2002
In 1999 the CCRA published guidelines setting out its policy with respect to granting waivers of source deduction obligations in circumstances where a bilateral income tax convention applies (the “Guidelines” – see Appendix A). There is continuing concern among taxpayers and the tax community that the “bright line” tests in the Guidelines will be used by the CCRA in interpreting the concepts of carrying on business and permanent establishment for treaty purposes, even though the OECD has adopted the view that neither concept is to be applied by reference to day counts.
(a) Would CCRA please comment.
(b) Is there any plan to revisit the Guidelines in the context of the current state of the law as expressed in [Dudney], particularly the “control of space” aspect or the concept that a non-resident in Canada for a substantial period of time at a client’s premises cannot have a fixed place of business unless the non-resident has a fixed place of business of his/her/its own?
The Guidelines do not purport, and are not intended, to establish a method of determining that a permanent establishment exists in Canada. Rather the Guidelines establish at the waiver stage, a level of comfort for the CCRA, under which level there is minimal potential that a permanent establishment exists.
Where a treaty-based waiver is denied, further representation for a reduction of withholding may be made through the application of an income and expense waiver or upon filing a tax return. At the filing stage a formal determination of whether the non-resident has a permanent establishment in Canada may be undertaken based on actual rather than prospective activities.
The determination of a permanent establishment based on a substantial presence test only is not acceptable to the CCRA because it does not reasonably reflect the potential for a permanent establishment under Canadian law in recurring situations. The duration required is a function of the facts. Also, it is considered that the facts necessary to determine “control of space” are not available at the waiver application stage.
The intent of the Guidelines therefore is to provide adequate protection to the fisc, while not imposing an undue administrative burden upon non-residents performing services in Canada, or upon Canadian payors. The Guidelines serve broadly to recognize situations where the non-resident does not have a permanent establishment in Canada, but protect the fisc in situations where it is not clear whether the non-resident has a permanent establishment in Canada.
The CCRA will continue to apply its Guidelines, without any changes due to the Dudney decision.
There has been a great deal of interest and concern expressed with respect to the application of section 105 of the Income Tax Act Regulations to non-resident partnerships, including legal advisors, accountants, consultants, and other experts who may from time to time be retained by Canadian taxpayers or their own Canadian advisors to render services in Canada by attending meetings or visiting sites in Canada. Consider, for example, a U.S. law firm, structured as a partnership, that works on a transaction and in the course of providing its professional services attends meetings in Canada.
(a) Does Regulation 105 withholding apply in such circumstances? Does this withholding apply if a non-resident client pays the non-resident advisor for the services provided in Canada?
(b) If Regulation 105 withholding is applicable, would each U.S-resident partner of the law firm be required to file a Canadian income tax return in order to obtain a refund, if one is applicable?
(c) Is the CCRA considering any administrative options in respect of the filing requirements for the individual partners of a non-resident partnership described in the above situation?
When a member of a non-resident partnership renders services in Canada, Regulation 105 applies. However, the member may apply to have the withholding waived if, for example, the income would not be taxable by Canada because of a treaty provision or because the related expenses incurred can be shown to be in excess of the income.
Regulation 105 withholding applies equally if a non-resident client pays the non-resident advisor for services provided in Canada. CCRA therefore considers that this withholding obligation applies whether or not the payment is made by a resident of Canada, or whether the payment is made to the person by which the services are actually performed.
Where Regulation 105 withholding has been applied each non-resident partner is required to file a Canadian income tax return in order to obtain a refund if applicable. However, a non-resident partnership may be granted a treaty-based waiver of withholding if the presence tests are met by the partnership as a whole and none of the exceptions apply. The presence in Canada of the individual partners and/or the employees of the partnership is considered for purposes of establishing the presence test in the period.
CCRA is reviewing the situation where the number of partners is numerous to determine if an administrative arrangement could be made in respect to the current filing requirements.
Please comment on the following additional issues with respect to Regulation 105 practices and procedures.
a) What is the relationship between Information Circular IC-75-6R and the treaty based waiver guidelines (see Appendix A)? Will the guidelines eventually be incorporated into the circular?
b) Please provide an update as to when reductions of withholding will be allowed based on estimated income and expenses. When will IC-75-6R be updated to include revisions to this process?
c) Please describe the roll of Headquarters in the Regulation 105 waiver process. Are any measures being adopted to enhance consistency among the practices and policies adopted in the various tax services offices?
The current version of Information Circular 75-6R (Required withholding from amounts paid to non-resident persons performing services in Canada) (IC75-6R) was published in 1988 and provides information concerning the withholding and remitting, waiver process, and reporting obligations with respect to income earned by non-residents providing services in Canada. The waiver guidelines provided in IC 75-6R considered non-residents not to have a permanent establishment in Canada where the person was present in Canada for a period of less than 60 days and was not entering Canada on a recurring basis.
This statement at first read may appear clear, but in practice was difficult to adapt to the varying circumstances faced each day. Over time various interpretations were adopted and interpretation of the term “recurring” was similarly varied.
In 1998 a draft discussion paper on proposed revisions to the guidelines for processing treaty-based waiver applications was shared with both internal and external stakeholders parties and much useful feedback was received. Many of the stakeholders welcomed the standardization of the CCRA’s procedures.
Based on CCRA’s review of this waiver process and procedures revised treaty-based waiver policy and procedures were put in place in November 1999. These guidelines are currently available on the CCRA website and CCRA intends to include these in the revisions to Information Circular 75-6R.
The treaty-based waiver policy provides for an up-front review of permanent establishment issues so that relief, in applicable situations, can be provided sooner to non-residents rather than later. Where however a treaty-based waiver is denied, further representation for a reduction in Regulation 105 withholding may be made through the income and expense waiver process.
This income and expense waiver application would normally include information and documentation relating to the contract to be performed in Canada, including the gross amount of the contract, any allocation of services inside and outside of Canada and identifiable expenses such as travel, per-diems, etc. relating to the services to be performed in Canada. Information Circular 75-6R is anticipated to be updated within this fiscal year (i.e. by March 31, 2003); and will include information pertaining to the CCRA Regulation 105 waiver processes.
The role of Headquarters in the Regulation 105 waiver process is to analyse, review, develop and implement the policy and procedures required by the tax services offices in order to process the various types of waivers. The CCRA continues to strive to achieve consistency in the application of the Regulation 105 waiver processes by providing tools, policies and procedures to the tax services office across the country.
One such tool is the “Waiver on Withholding System (WOW) which is a nation wide on-line system, which assists all tax service offices in processing waiver applications. The WOW is maintained by Headquarters and includes the most recent policy and procedures. Some of the benefits of the WOW and the waiver guidelines are a consistent, fair and equitable approach for all non-residents, certainty to applicants via a more transparent decision-making process, standardization of waiver practices across the CCRA and increased awareness of the withholding requirements among payors.
CCRA continues to review its policies and procedures in order to ensure that both the tax services offices and non-residents are provided with consistent and accurate information as to their obligations under Regulation 105 of the Act.
Interpretation Bulletin IT-221R3 dealing with determinations of individual residence status was issued on December 21, 2001. Please comment on why this Interpretation Bulletin was revised and what significant changes to the CCRA interpretative and administrative positions in the area of individual residence status determinations are reflected in the revisions. In particular, please comment on the apparent elimination of the “two-year presumption”.
See response from the Rulings Directorate
Section 216 of the Income Tax Act permits non-residents to elect to file returns and be subject to tax under Part I of the Act rather than Part XIII. We understand that the CCRA is developing a policy/procedure to deal with late-filed returns under section 216. Could you please comment on this policy, both as to its contents and the timing of its release.
Every non-resident person is required to pay an income tax of 25% on amounts received on account of rent on real property in Canada or a timber royalty. The 25% tax is usually considered the final tax liability; however, the non-resident may elect to file an income tax return under section 216 of the Act (“the 216 return”) and to pay tax on the net income instead of the gross.
The 216 return must be filed within:
- two years from the end of the taxation year; or
- six months from the end of the taxation year if Form NR6 has been filed and approved.
Normally, the tax payable on the 216 return is less than the tax withheld on the gross rental income.
The CCRA has reviewed this provision in respect to the filing requirements under section 216 of the Act and has instituted a section 216 late-filing policy, applicable to the 1997 and future taxation years. This policy will allow a non-resident one opportunity to late-file a section 216 income tax return unless:
- the non-resident has previously been advised by the CCRA of responsibilities under Part XIII in respect of rental income or timber royalties earned in Canada, or
- the CCRA has initiated enforcement activity that would have identified the failure to comply with Part XIII.
The purpose of the policy is therefore to allow the non-resident one opportunity to come forward and correct withholding and filing deficiencies under Part XIII. Penalties will not be applied, however, arrears interest may be charged for any failure to deduct and remit under Part XIII, as well as for any outstanding Part I tax liability. Additional information about this section 216 late-filing policy will be made available shortly on the CCRA website and also through the CCRA International Tax Services Office.