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 Part XIII withholding tax applies on interest payments from a Canadian resident corporation to non-resident individuals who are uncles of the individual that is the sole shareholder of the corporation.
Position: No
Reasons: The creditors who are uncles of the individual that is the sole shareholder of the corporation are deemed to deal at arm's length with the corporation, unless the facts indicate otherwise.
XXXXXXXXXX
2014-052507
V. Anissimov
(416) 973-3049
April 16, 2014
Dear XXXXXXXXXX:
Re: Part XIII tax on interest payments
We are writing in response to your letter of February 7, 2014, in which you requested our view as to whether paragraph 212(1)(b) of the Income Tax Act (the "Act") would apply in a particular situation. The following hypothetical circumstances will be used to address your request.
A corporation (the "Taxpayer") is a Canadian-controlled private corporation, as defined in subsection 125(7) of the Act, all of the issued and outstanding shares of which are owned by a Canadian resident individual (the "Shareholder"). The Taxpayer has acquired shares of another Canadian resident corporation from four individuals who are non-residents (within the meaning assigned in subsection 248(1) of the Act) (the "Non-Residents") in exchange for four interest bearing notes (the "Notes"). Each of the Non-Residents is an uncle of the Shareholder. The Notes bear normal market interest rates.
Your enquiry can further be summarized as follows: Would the interest payments made by the Taxpayer to the Non-Residents under the Notes be subject to withholding tax under Part XIII of the Act?
Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Ruling.
Pursuant to paragraph 212(1)(b) of the Act, every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I of the Act to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, interest that
(i) is not fully exempt interest and is paid or payable
(A) to a person with whom the payer is not dealing at arm's length, or
(B) in respect of a debt or other obligation to pay an amount to a person with whom the payer is not dealing at arm's length, or
(ii) is participating debt interest...
Therefore, provided that the interest payable by the Taxpayer to the Non-Residents is not fully exempt interest and is not participating debt interest (both of these terms are defined in subsection 212(3) of the Act), such interest would only be subject to tax under paragraph 212(1)(b) of the Act if the Taxpayer and the Non-Residents were not dealing at arm's length.
Subsection 251(1) of the Act describes the circumstances under which persons do not deal with each other at arm's length. Pursuant to paragraph 251(1)(a) of the Act, related persons are deemed not to deal with each other at arm's length. As indicated in paragraph 251(2)(b) of the Act, a corporation (e.g., the Taxpayer) is related to
(i) a person who controls the corporation, if it is controlled by one person,
(ii) a person who is a member of a related group that controls the corporation, or
(iii) any person related to a person described in subparagraph (i) or (ii).
Therefore, in order for the Taxpayer to be related to the Non-Residents, the Non-Residents must be related to the Shareholder.
Pursuant to paragraph 251(2)(a) of the Act, individuals are related to each other if they are connected by blood relationship, marriage or common-law partnership or adoption. However, an uncle is not connected by blood relationship with his nephew or niece since, pursuant to paragraph 251(6)(a) of the Act, persons are connected by blood relationship only if one is the child (taking into account the extended meaning of "child" in subsection 252(1) of the Act) or other descendant of the other or one is the brother or sister of the other. Therefore, an uncle is not related to his nephew or niece.
As a result, the Non-Residents are not related to the Shareholder and, therefore, they are not related to the Taxpayer. Because of this, paragraph 251(1)(a) of the Act does not apply to deem the Non-Residents and the Taxpayer not to deal at arm's length.
It should be noted, however, that pursuant to paragraph 251(1)(c) of the Act, it is still 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 the general guidelines in determining whether parties to a transaction are not dealing at arm's length, please see paragraphs 22-26 of Interpretation Bulletin IT-419R2, Meaning of Arm's Length, which is available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tp/it419r2/it419r2-e.pdf.
In conclusion, provided that paragraph 251(1)(c) of the Act does not apply in the hypothetical situation described above, the Non-Residents would be considered to be dealing at arm's length with the Taxpayer. As a result, provided that the interest payable by the Taxpayer to the Non-Residents is not participating debt interest (as noted above), such interest would not be subject to withholding tax under Part XIII of the Act.
We trust our comments will be of assistance.
Yours truly,
Lori Michele Carruthers CPA, CA
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
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