2013-0495611E5 Withholding on incentive payments to non-residents

Principal Issues: Whether incentive payments made by Canco to non-resident individuals are subject to withholding or reporting.

Position: Likely not subject to withholding in this hypothetical fact pattern, but should be reported on T4A.

Reasons: Legislation.

Author: Basso, Denise
Section: 153(1); Regulations sections 100, 101, 102, 103, 104 and 105; 212(1)(d).

XXXXXXXXXX                                      2013-049561
                                                              Denise Basso

September 24, 2015

Dear XXXXXXXXXX:

Re: Withholding tax requirements on incentive payments to non-residents

We are writing in reply to your email of June 26, 2013, in which you requested our views concerning withholding and reporting requirements related to incentive payments made to non-residents of Canada in a hypothetical situation. We apologize for the delay in responding. 

Facts

1.    A Canadian resident manufacturing corporation (“Canco”) pays the employees of certain dealers (“Dealer Employees”) an incentive payment (“Incentive Payment”) for each warranty registered on Canco’s products. The warranties registered by the Dealer Employees cover products manufactured by Canco and sold by the dealers outside of Canada.

2.    The Dealer Employees are, and have always been, non-residents of Canada. They do not perform any services in Canada.

3.    Canco and the Dealer Employees do not have an employer/employee relationship, based on the common law tests developed through Canadian jurisprudence.

You have asked us to comment on whether withholding tax should apply to the Incentive Payments, as well as how Canco should report these payments to the Canada Revenue Agency.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Part I Tax

Subsection 153(1) in Part I of the Act requires every person that pays an amount described therein to deduct or withhold from the payment the amount determined in accordance with prescribed rules and to remit, at the prescribed time, that amount to the Receiver General. In particular, paragraph 153(1)(g) refers to payments in respect of fees, commissions or other amounts for services. 

The prescribed rules are found in Regulations 100 through 108, of which only Regulations 100 through 105 may be relevant based on the facts provided. 

Section 101 of the Income Tax Regulations (the “Regulations”) requires every person that makes a payment described in subsection 153(1) of the Act to deduct or withhold therefrom, and remit to the Receiver General, the amount, if any, determined in accordance with the rules prescribed in Part I of the Regulations.

Regulations 102 and 103 specify the amounts to be deducted or withheld by an employer in respect of any remuneration paid to an employee and subsection 104(2) of the Regulations sets out certain exceptions to these general withholding requirements.

For the purposes of Part I of the Regulations, subparagraph (a)(ii) of the definition of “remuneration” in Regulation 100(1) includes any payment that is in respect of commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, paid to an officer or employee or former officer or employee. Whether Canco and the Dealer Employees have an employer/employee relationship, as developed through Canadian common law, is a question of fact. Provided no such relationship exists, the Incentive Payment would not meet this definition and Regulations 102 and 103 should not apply to require Canco to deduct or withhold any amount from the Incentive Payments it makes to the Dealer Employees.

Regulation 105 imposes a withholding tax of 15% on payments to non-residents in respect of services rendered in Canada. Whether an individual performs services in Canada is generally a question of fact. (footnote 1)  However, provided the Dealer Employees do not perform any services in Canada Regulation 105 would not apply. 

Part XIII Tax

Pursuant to subparagraph 212(1)(d)(iii) of the Act, every non-resident person must pay an income tax of 25% on every amount that a person resident in Canada pays or credits to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, any payment for services of an industrial, commercial or scientific character performed by the non-resident person where the amount payable for those services is dependent, in whole or in part, on: (A) the use to be made of, or the benefit to be derived from, those services; (B) production or sales of goods or services; or (C) profits.  However, subparagraph 212(1)(d)(iii) of the Act does not apply to payments that are made for services performed in connection with the sale of property or the negotiation of a contract.

The Incentive Payments are made on warranties registered by the Dealer Employees on products manufactured by Canco and sold by the dealers. Given the breadth of the expression "in connection with" and of the term "property", even if the Incentive Payments were payable as consideration for a service described in any of clauses 212(1)(d)(iii)(A) to (C), they should not be subject to Part XIII withholding tax based on the exception in the post amble to subparagraph 212(1)(d)(iii) since they appear to have been made either for services performed in connection with the sale of property or the negotiation of a contract.

Reporting Requirements

Notwithstanding that no withholding tax is required in a situation where there is no employer/employee relationship, the Incentive Payments are included in paragraph 153(1)(g) of the Act, such that Canco would still be required to file an information return (T4A - Statement of Pension, Retirement, Annuity, and Other Income) in accordance with Regulation 200(1) in respect of Incentive Payments it makes to the Dealer Employees. For further information on the filing requirements associated with T4A slips, please visit the Canada Revenue Agency’s website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/rtrns/t4a/menu-eng.html.

We trust our comments are of assistance.

Yours truly,

Julia Belova
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  In addition, note that section 253 of the Act deems a non-resident person to be carrying on business in Canada in certain circumstances, which includes soliciting orders or offering anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada. 

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