Revenue Canada's guidelines for treaty-based waivers of Regulation 105 withholding.

October 21, 1998

On October 21, 1998, Tax Executives Institute filed comments in respect of Revenue Canada's Discussion Draft of Guidelines for Treaty-Based Waivers of Withholding Tax Under Regulation 105. The comments took the form of a letter from TEI President Lester D. Ezrati to Sara Greenblatt, Director General of Revenue Canada's International Tax Directorate. The Institute's comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco Inc. Contributing substantially to the development of TEI's comments were Alan Wheable of Canada Trust, Vincent Alicandri of Xerox Canada Ltd., and David M. Penney of General Motors of Canada Ltd.

In August, Revenue Canada released a discussion paper entitled Proposed Changes to Revenue Canada's Guidelines for Treaty-Based Waivers of Regulation 105 Withholding. On behalf of Tax Executives Institute, I am pleased to provide the following comments and recommendations.

Background

Tax Executives Institute, Inc. is the principal association of corporate tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency. As a result, the comments generally reflect the views of Canadian payers and service purchasers rather than the views of U.S. payees or service providers.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government. We are pleased to respond to the invitation to comment on the recommendations set forth in Revenue Canada's discussion paper concerning the waiver process under Regulation 105.

Discussion

Since the North American Free Trade Agreement (NAFTA) came into force several years ago, there has been explosive growth in cross-border trade and services within the free-trade zone. Before NAFTA, cumbersome procedures restricted the opportunities for cross-border service providers, especially for smaller and medium-sized enterprises. Besides removing trade barriers, publicity surrounding NAFTA itself engendered greater awareness among nonresidents of the business opportunities in Canada as well as awareness among Canadian businesses and consumers that their choices are no longer limited to domestic service providers. Many more firms than before are soliciting business in Canada, thereby affording greater competition for price and performance on ordinary services for Canadian companies. Likewise, Canadians are free to pursue services from niche foreign companies that provide unique services that may not be available domestically.

Regrettably, vestiges of the pre-NAFTA regime remain. Specifically, Regulation 105, issued under the authority of section 153 of the Canadian Income Tax Act, imposes withholding tax on fees paid to non-residents for services rendered and stands as a barrier to the full promise of NAFTA. Regulation 105 also authorizes Revenue Canada to develop administrative procedures to enforce or waive the application of the withholding rules. As a result, TEI is pleased that Revenue Canada has initiated this study of the Regulation 105 waiver process and welcomes the opportunity to provide its comments.

Paragraph 153(1)(g) of the Canadian Income Tax Act and subsection 105(1) of the Income Tax Regulations require a withholding of 15 percent from payments of fees, commissions, or other amounts paid to non-resident individuals, partnerships, or corporations in respect of services rendered in Canada, other than in the course of regular and continuous employment. Payments in respect of regular and continuous employment in Canada, made to non-resident individuals, are not subject to 15-percent withholding but rather are subject to tax deductions on a basis similar to residents. Withholding under Regulation 105 is considered a payment on account of the non-resident's liability and...