19 June 2013 External T.I. 2012-0465651E5 - Part XIII Tax on Interest Paid to Non-resident

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the payment of interest by a Canadian corporation to a non-resident corporation which owns 27% of the Canadian corporation is subject to the 25% Part XIII withholding tax.

Position: A question of fact.

Reasons: Even if the corporations are not related, under the 251(1)(c) definition of arms-length, "...it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length."

XXXXXXXXXX
2012-046565
Andrea Boyle, CGA

June 19, 2013

Dear XXXXXXXXXX:

Re: Part XIII Tax on Interest Paid to Non-resident

We are writing in reply to your letter dated October 9, 2012. You asked us to confirm that Part XIII withholding taxes do not need to be deducted from interest payments in the situation described. We apologize for the delay in replying.

In the situation described, a Canadian-resident corporation is owned 73% by another Canadian corporation and 27% by a non-resident corporation. The Canadian-resident corporation makes interest payments to the non-resident corporation. In your view, since the non-resident corporation does not have a controlling interest in the Canadian-resident corporation, the two corporations are dealing at arm's length with each other, and no Part XIII withholding is required on the interest payments.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

OUR COMMENTS

Generally, under paragraph 212(1)(b), a 25% income tax is withheld on interest that a person resident in Canada pays or credits to a non-resident person where the interest is paid or payable to a non-resident person with whom the payer is not dealing at arm's length.

The term "arm's length" is defined under subsection 251(1) and indicates, among other things, that related persons shall be deemed not to deal with each other at arm's length and that, otherwise, it will be a question of fact whether persons not related to each other are, at a particular time, dealing with each other at arm's length. For more information on the meaning of non-arm's length, please see paragraphs 22 to 26 of the CRA Interpretation Bulletin IT-419 – Meaning of Arm's Length. This bulletin is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it419r2/README.html.

You have not provided complete details on the ownership of the shares of the non-resident corporation or of the other owner of the Canadian corporation. However, even assuming that payer and payee corporation do not meet the definition of "related persons", it is a question of fact to be determined by taking into account all of the facts and circumstances surrounding the transactions whether or not the two corporations are, at a particular time, dealing with each other at arm's length.

We trust that these comments will be of assistance.

Yours truly,

Doug Watson
for Director
Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch