Canco entered into a contract (“Initial Contract”) with a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. Prior to the completion of the services, and in light of the financial difficulties of NR, Canco and NR entered into “Payment Agreements” under which Canco provided payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR, with such funds placed into dedicated bank accounts and paid to the subcontractors upon the authorization of both NR and Canco. The Directorate stated:
[B]ased on the terms of the Payment Agreements … Canco agrees to make advanced payments to NR that are set off or deducted from the amount due by Canco to NR required under the Initial Contract. …[S]uch advanced payments are [quoting Weyerhaeuser] in respect “of remuneration for services rendered in Canada and thus potentially taxable by Canada in the non-resident’s hands”, not in the nature of a reimbursement of expenses of the subcontractor. As such, the nature of the payments is different from [those] … in … 2008-29716 … .
In particular, it is our view that the advanced payments made by Canco under the terms of the Payment Agreements are payments to NR for the services performed in Canada under the Initial Contract. As such, the recipient of the payments is NR in payment for such services and the payments are income in NR’s hands. If NR subcontracts its obligations under the Initial Contract rather than performing them directly and the amounts are ultimately paid by NR to subcontractors, that does not alter the fact that Canco is required to pay NR for services in Canada under the terms of the contracts and the Payment Agreements.
Accordingly … the advance payments made by Canco to NR under the Payment Agreements are subject to the withholding requirements of section 105 … .