Who can resist the double dip? Apparently not the CRA.
Once in a while a case comes along that makes me wonder what they’re smoking over at the Appeals Division. In the case of Stora Enso v. The Queen the CRA taxed the same payment twice. Not surprisingly, the Tax Court held against them.
The case deals with Regulation 105 withholding. Anyone paying a non-resident person a fee in respect of services rendered in Canada must withhold 15 per cent of such payment. This regulation is in place to ensure that if a non-resident does business in Canada, the CRA doesn’t have to send their agents around the globe to enforce the law. The key thing to remember here is that it doesn’t matter who the parties to the actual payment are. The withholding requirement applies to any payment in respect of services rendered in Canada by a non-resident, regardless of who pays and who gets paid.
With that in mind, in this case, the CRA went a bit too far. The facts are simple. A Canadian company (Canco) hired a Swedish consulting firm (Swedco). Instead of Canco paying Swedco, a related company (Sisco) chipped in to settle the bill. Canco then reimbursed Sisco.
Some time later, during an audit, the CRA noticed that Canco made a payment to Sisco in respect of a service rendered by Swedco, a non-resident. Since Reg. 105 applied, Canco remitted the 15% to the CRA. But the story does not end here.
The CRA then assessed Sisco for 15% of the amount it paid to Swedco in respect of the same service. Defies logic, right? Well, that’s precisely what the Tax Court said, and decided in favour of Sisco.
Two other noteworthy points came out of this case. First, when Canco made its remittance, it simply calculated 15% of the amount paid to Swedco. However, the tax itself was also considered part of the payment to Swedco, as it was ostensibly paid on account of Swedco’s Canadian tax liability. So Canco was assessed correctly for 15% of the 15% tax remittance.
And finally, the Court commented on the application of the withholding tax on payments for “out-of-pocket” disbursements. Since such amounts were not itemized on Swedco’s invoice, they could not be distinguished clearly and so the 15% applied. Where an amount paid is clearly in respect of disbursements, however, and not the services rendered, the tax does not apply.
Anyhow, all of this begs the question I’m sure you are all asking: What is this Regulation 105 withholding tax all about, and why should you care? Stay tuned.