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.
Principal Issues: In CRA document 2022-0943241E5, the CRA changed the position expressed in document 2008-0297161E5 and provided a new position on the application of Regulation 105 to services billed by a non-resident for services rendered in Canada. What is the rationale for the change in CRA’s position?
Position: The position in CRA document 2008-0297161E5 expanded the conclusion of Weyerhaeuser case to payments to subcontractors. That CRA position was reversed in 2022.
Reasons: The 2022 CRA document indicates that the CRA will administer Regulation 105 in a manner which is consistent with the conclusion of the Court in Weyerhaeuser Company Limited v The Queen (2007 TCC 65).
TAX EXECUTIVES INSTITUTE, INC.
INCOME TAX QUESTIONS
Submitted to
CANADA REVENUE AGENCY
for the NOVEMBER 19, 2024 meeting
Question C.12. Regulation 105
In technical interpretation 2022-0943241E5 (E), the CRA clarified its new position on the application of Regulation 105 to services billed by a non-resident for services rendered in Canada. In the hypothetical situation, a Canadian taxpayer (“CanCo”) engages a non-resident of Canada (“USCo”) to provide services, some of which are to be rendered in Canada. USCo subcontracts its Canadian subsidiary (“CanSub”) to provide the services that are to be rendered in Canada.
CRA’s view is now that the fees for services rendered by CanSub (assume $100 paid by USCo to CanSub) do not reduce the amount of fees paid to USCo which are subject to withholding under Regulation 105.
What is the rationale for the change in CRA’s position from its comments in document 2008-0297161E5?
Our understanding, based on the Tax Court’s decision in Weyerhaeuser Company Limited v The Queen (2007 TCC 65) (“Weyerhaueser”), is that the purpose of the withholding tax requirement is to ensure that funds are available if Canadian income tax is assessed against a nonresident in respect of income earned in Canada. In reality, absent Regulation 105, the only income that might escape Canadian taxation in the scenario above is any amount charged by USCo to CanCo in excess of what CanSub charged USCo. Instead, the income is taxed twice: once as revenue of CanSub and once as withholding tax pursuant to Regulation 105.
In addition, the policy puts an unnecessary administrative burden on non-residents that do not otherwise have a presence in Canada.
In TEI’s view, this result is perverse and unfair to both USCo and CanCo. Income earned in Canada should be taxed only once. In addition, the amount charged by USCo to CanCo is not “income” earned by a non-resident. It is revenue offset by a corresponding – and easily traceable – expense. TEI submits that CRA’s interpretation is squarely outside the spirit of the legislation and the Tax Court’s interpretation of that legislation.
TEI is also concerned that the change in interpretation will have a negative impact on the Canadian tax base. Non-resident service providers will now be motivated to avoid Canadian subcontractors altogether – including their own subsidiaries – rather than deal with the administrative and fiscal burden, such that there will no longer be any income to tax.
Response C.12. Regulation 105
The answer in CRA document 2022-0943241E5 was in response to a question that asked clarifications about a position expressed in CRA document 2019-0823641I7, which did not appear to be fully consistent with the views in document 2008-0297161E5.
In Weyerhaeuser, the conclusion of the Court was that no withholding was required on amounts paid to reimburse the non-resident contractor for meals, travel and other outlays of the same nature. The position in CRA document 2008-0297161E5 expanded the conclusion of the Court to payments to subcontractors. That CRA position was reversed in 2022.
The 2022 CRA document indicates that the CRA will administer Regulation 105 in a manner which is consistent with the conclusion of the Court. Out of pocket outlays for travel, meals and similar items are not part of the Regulation 105 base where the client has agreed to reimburse them. Otherwise, Regulation 105 applies to fees, commissions or other amounts paid for services rendered in Canada.
Later at this conference, the Department of Finance will respond to your questions dealing with the policy underlying Regulation 105.
Angelina Argento
2024-103946
November 19, 2024
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