1999 Ruling 9831393 - INTEREST SOURCING - TREATY EXEMPTION

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Is interest paid by a Canadian corporation to a related Australian corporation (that does not carry on business in Canada) and that is borne by a permanent establishment the Canadian corporation has in Australia, exempt from tax in Canada?

Position: Yes

Reasons: See detailed issue sheet

XXXXXXXXXX						983139

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX

Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided in your correspondence of XXXXXXXXXX and during our various telephone conversations (XXXXXXXXXX).

The above-referenced taxpayer files its T2 Returns with the

XXXXXXXXXX Tax Centre.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved in this request:

(a) is involved in an earlier return of the taxpayer or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c) is under objection,

(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, and

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof; all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated and all references to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act unless otherwise indicated;

Facts

1. XXXXXXXXXX ("Canco") is a XXXXXXXXXX.

2. Canco carries on a XXXXXXXXXX business in Canada and abroad through branches and subsidiaries.

3. In Australia, Canco carries on its XXXXXXXXXX business through a branch (the " Branch"). The Branch carries onbusiness in Australia through a permanent establishment situated therein.

4. The Branch is currently partly funded by Canco and interest paid by the Branch to Canco is subject to Australian withholding tax.

Proposed Transactions

5. Canco will incorporate a wholly-owned finance subsidiary in Australia ("Finco"). Finco wilt be resident in Australia for purposes of the Act and for purposes of the Canada-Australia Income Tax Convention (the "Convention"). Finco will be a foreign affiliate and controlled foreign affiliate of Canco.

6. Finco will raise funds from arm's length parties (the "Arm's Length Investors") on commercial terms. These funds will be raised by way of debentures (the "Debentures") issued in the overseas financial market (outside Australia, mostly the XXXXXXXXXX market) with maturities of less than one year. The Arm's Length Investors may be corporations or individuals. The Arm's Length Investors will not be resident in Australia or Canada.

7. Finco will deposit these funds on commercial terms with the Branch (the "Deposits"). The Deposits will be used by the Branch in carrying on its lending business. The interest rate on the Deposits will be greater than the borrowing rate on the Debentures issued to the Arm's length Investors.

8. The obligation of Finco to the Arm's Length Investors will be unconditionally guaranteed by Canco.

Additional Information

The interest paid by the Branch to Finco and by Finco to the Arm's Length Investors will be exempt from Australian withholding tax. XXXXXXXXXX.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to allow the Branch to raise funds outside of Australia free of Australian withholding tax.

XXXXXXXXXX

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The interest received by Finco from the Branch in respect of the Deposits will be exempt from Canadian withholding tax by virtue of the Convention.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX. For greater certainty, the above ruling is only in respect of deposits made before XXXXXXXXXX.

This ruling is based on the Act and the Convention in their present form and does not take into account any proposed amendments to the Act or the Convention which, if enacted into law, could have an effect on the ruling provided herein.

Comments

1. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a)the determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital of any shares referred to herein; or

(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

2. It is our opinion that income earned by Finco in respect of the Deposits will be foreign accrual property income of Finco by virtue of paragraph 95(2)(a.3) of the Act.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch