In 2011-0416181E5 (released on Wednesday), the CRA considered a US company (US Co) that offered to Canadian companies (Cancos) the ability to advertise on US Co’s website. The CRA concluded that payments by the Cancos were for advertising services, and were not “for the use in Canada of property” (i.e., US Co’s website). Nonetheless, the payments to US Co (for the services) were based on the number of “clicks” of potential customers on the advertising. This meant the payments would be subject to 25% withholding tax in Canada under s. 212(1)(d)(iii). However, because US Co was a resident of the US, US Co was shielded from this withholding tax under the Canada-US treaty. Treaty protection was available because US Co did not have a permanent establishment in Canada under Article V of the treaty, and the payments did not constitute “royalties” as specifically defined in Article XII of the treaty.
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