The starting point is Article 15(2), which deals with debts in which a particular company and one of its shareholders have a stake. However, the provision is actually much broader, since the real creditor does not need to be that particular corporation and the actual debtor does not need to be a shareholder in a corporation. It may apply if (1) the creditor is the relevant corporation or other affiliate and (2) the debtor (other than a corporation resident in Canada) is a shareholder of that particular corporation (or is someone who does not trade with it on market terms). 23 The provisions of Article 15(2) are supported by detailed `consecutive` provisions aimed at combating tax avoidance, which are intended to prevent circumvention by means of the use of intermediaries. The basic premise of this rule is that these loans are de facto distributions of shareholders and must be treated as such and included in the debtor`s income, unless they fall within certain limited exceptions: for the purposes of section 212(1)(a), the Department considers that the term “management or administration” generally covers planning functions. Control, control, coordination, systems or other functions at the management level. These functions can include services for different departments of a company, such as. B accounting, finance, law, electronic data processing, employee relations, management consulting, labour negotiations, taxation, etc. in relation to management or administration.
It is not possible to provide a full definition of administrative costs in an interpretative bulletin and it is proposed to read the above remarks as well as the explanations below in order to determine whether an amount paid or credited to a non-resident in certain circumstances constitutes an administrative tax subject to a non-resident tax under Article 212, paragraph 1(a). The withholding tax that applies to Canadian income from non-resident real property is only part of the non-resident tax system. For example, different rules apply to non-residents with respect to the disposition of taxable Canadian property. If you are a non-resident with Canadian income and are concerned about meeting your obligations under the law, contact our top tax lawyers in Toronto. The CRA valued Petro-Canada at 15% of the $18.8 million charged to it by FMC (plus interest and penalties) on the basis that Petro-Canada had to withhold under Regulation 105 because the legal beneficiary of these amounts (i.e., the company with a legal claim against Petro-Canada) was FMCI, a non-resident. Although the payments were made for work actually performed by a resident of Canada (FMC) that had been imposed in Canada for him as a Canadian resident, the Rating Agency concluded that Regulation 105 was applicable. Indeed, FMCI was the only party with whom Petro-Canada had entered into a service delivery agreement, which means that the payments made by Petro-Canada for services in Canada were made constructively to FMCI, even though they were received by FMC on FMCI`s instructions. Petro-Canada (presumably compensated by its counterpart FMCI) did not challenge the valuations in court. FMCI does not appear to have filed Canadian tax returns, so it was unable to claim a refund. Finally, the courts denied FMC the opportunity to recover the amounts withheld, although they caused a stroke of luck to the CRA because it was neither the assessed taxpayer nor the legal beneficiary (who had no direct legal rights against the client). The case is a cautionary tale about how the credit rating agency aggressively manages Regulation 105 and how unforeseen obligations under Regulation 105 can be created in situations beyond the simplest case where the recipient provides services directly to the payer. Finally, subsection 90(6) applies if the creditor is a “foreign affiliate” of a corporation established in Canada (instead of the Canadian corporation itself) and the debtor is with that Canadian resident (or is not acting on market terms).
Therefore, subsection 90(6) deals with both loans that would otherwise replace the foreign subsidiary`s equity distributions directly to the resident of Canada and de facto repatriations of “under” Canada to non-residents “through” the resident of Canada. You can also obtain current tax rates and the effective date by contacting the CRA for Part XIII non-resident tax and withholding tax accounts or by visiting the Department of Finance Canada. Some Canadian tax treaties include a special section dealing with administrative costs. In most cases, however, there is no specific provision that results in the article regulating the profits of the companies in the contract. 17 The CRA accepts this finding (up to a “reasonable” fee) in Information Circular IC77-16R4, paragraph 15. In such cases, Canada shall not be permitted to tax a resident of the other country who meets the standard for the use of the Contractual Services set out in this Agreement, unless the non-resident provides such services through a permanent establishment in Canada. A non-resident cannot negotiate with an interest payer on market terms, either because they are related to the payer (for example. B a company and the person who controls it), either because it is assumed that it is not acting on market terms in fact in the respective circumstances.
Such a de facto arm`s length status has been shown in situations where one party is under the influence or control of the other party, where a common mind directs negotiations for both parties to a transaction, or where the parties act jointly without separate interests (see, for example. B Canada v. McLarty, 2008 SCC 26, at Ç 62). The credit rating agency announced in 2020 that it was no longer attempting to impose a withholding tax on interest charged on arm`s length swap payments. 6 IFA 2020 Roundtable, question 2. Determining whether an interest payment system is inferior to equity participations can be particularly complex given the complexity of international commercial lending agreements. As a general rule, however, a periodic interest payment determined at a fixed interest rate and determined solely in proportion to the amount due would generally not be considered equity interest, unless other characteristics of the loan agreement affect the way in which interest is determined. It is best to consult a professional Canadian tax lawyer if you have questions about whether a particular international loan agreement would be subject to withholding interest due to the equity participation requirement.
Conversely, if a partnership receives a payment described in Part XIII, the partnership itself is considered a non-resident (i.e., so Part XIII applies to the payment), unless the partnership is a “Canadian partnership”. A “Canadian partnership” is defined (section 102) as a partnership whose members are all resident in Canada for the purposes of the ITA (whether the partnership was formed under Canadian law or a foreign jurisdiction is not relevant). Therefore, partnerships considering hosting a partner who is not (or could become) a resident for itA purposes should be aware of the potential withholding obligations that this may entail for persons making payments to the partnership. (Note: For the purposes of applying a tax treaty to an amount paid by a partnership, the general rule is to verify the partnership with the partners themselves, who may or may not be entitled to contractual relief depending on their particular circumstances.) Various other payments in excess of those described above are also subject to Part XIII withholding. Perhaps the most important thing to keep in mind is paragraph 212(1)(i), which applies to payments related to what are colloquially referred to as “restrictive agreements.” These are payments received in exchange for the granting of such a “restrictive agreement”, which is generally defined as an agreement or company that influences (or is intended to influence) the acquisition or supply of real estate or services by the recipient or a person associated with the recipient (§ 56.4). While the provision is subject to certain exceptions with respect to non-compete agreements and similar liabilities entered into in connection with a sale of real property, the wording of this provision is extremely broad and particularly prejudicial to non-residents since it can reclassify capital gains, which are often not taxed in Canada, in payments subject to the maintenance of Part XIII. Although these rules were originally motivated by payments made for commitments not to compete with buyers, they go far beyond this simple case and require special attention when sellers (or arm`s length figures) make commitments or agreements beyond a simple sale of shares. .
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