Subject: Regulation 105 versus Instalment Payments
We are writing in reply to your memorandum dated November 27, 1990, concerning the overlapping of tax instalment requirements and withholding requirements in respect of non-resident corporations who are subject to tax in Canada. The issue regarding Income Tax Regulation 105 and its affect on non-resident members of a joint venture was dealt with in our memorandum to you dated January 7, 1991 (copy enclosed).
You have provided us with the following scenario:
(a) Company A, a resident of Canada, forms AB Joint Venture with Company B, a resident of the U.K..
(b) AB Joint Venture enters into a contract to provide certain services to Company X during the development of the offshore oil fields.
(c) As Company X is making payments for services and the joint venture has a non-resident person as a venturer, then Company X could be required to withhold from the payments made to the joint venture as is required under Section 105 of the Regulations.
Based on the scenario described above, you have asked the following questions:
a) In the first year of operation in Canada of the joint venture, would the non-resident corporate member of the joint venture (hereinafter referred to as "non-resident") be considered to be a new corporation and therefore instalments would not be required in that year?
b) Would the "non-resident" be qualified to make instalment payments, if any are required, commencing with the second year of operation of the joint venture?
c) Would the "non-resident" be entitled to make representation based on the grounds that they are taxable under paragraph 2(3)(b) of the Act and fall under subsection 157(1) of the Act and are therefore not subject to the withholding tax requirements under Regulation 105?
d) If the "non-resident" qualifies under subsection 157(1) of the Act, is Regulation 105 withholding required to be made on payments made to the joint venture?
Where a non-resident corporation that is a member of a joint venture is carrying on business in Canada, the non-resident venturer is taxable on its share of profit of the joint venture by virtue of paragraph 2(3)(b) of the Act. The non-resident will be carrying on business through a permanent establishment if it carries on business through its fixed place of business or, in certain situations, through a fixed place of business of another person.
In response to a and b above, a "non-resident" who is liable for Part I tax is subject to the instalment rules in section 157 of the Act in the same manner as any other corporation liable for Part I or Part VI.l tax. Where the "non-resident" is an existing company but is in its first year of operation in Canada in respect to its participation in the joint venture, instalments would be required pursuant to section 157 of the Act if the "non-resident" had Part I or Part VI.l tax payable in the current taxation year and in the immediate preceding taxation year in excess of $1,000.00 (see subsection 157(2.1)). This situation may occur where the "non-resident" carried on a different business activity in Canada or disposed of taxable Canadian property in the preceding year or was a resident of Canada in the preceding year. Where no Part I or Part VI.1 tax is payable in the immediate preceding taxation year, the "non-resident" will not be required to pay instalments in his first year of operations in Canada as a member of the Joint Venture. The fact that the joint venture is in its first or second year of operation in Canada has no relevance in determining the application of section 157 of the Act to its members.
In regard to c and d above, we are in agreement with your concluding comments that the withholding tax requirements of Income Tax Regulation 105 are to be followed unless they are otherwise waived by the department regardless of the calculation of instalment payments under section 157 of the Act.
There is an overlap between the requirements of Income Tax Regulation 105 and section 157 of the Act that could create financial hardship for the taxpayer. However, it has been our understanding that the department will reduce corporate instalment requirements by amounts withheld at source (see page 14 of the attached 1990 Corporate Instalment Guide). As this is strictly an-administrative policy, you may wish to follow the matter up with Revenue Programs.
21(1)(b)
for Director Reorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch