Section 214

Canco was assessed for and paid Part XIII tax regarding royalty payments that it made to its non-resident parent (Parentco) and to a non-resident subsidiary of Parentco (Sisterco), without seeking to recover from Parentco and Sisterco the amount of Part XIII tax paid on their behalf.

For the purposes of s. 15, was there a debt owing by Sisterco to Canco arising from the payment made by Canco pursuant to s. 215(6)?

After referring to 2006-0214291I7, which indicated that the unrecovered payment of Parentco’s Part XIII tax constituted a taxable benefit subject to ss. 15(1) and 214(3)(a) and that ss. 56(2) and 214(3)(a) did not apply to the unrecovered payment of Sisterco’s Part XIII tax because such payment would not be included in the non-resident’s shareholder’s income if Part I were applicable to it, the Directorate stated:

[W]e would consider that, for the purposes of section 15, Canco conferred a benefit on Parentco and Sisterco, rather than considering that Parentco and Sisterco received a loan from or became indebted to Canco.

Consequently, the amount of Part XIII tax paid by Canco on behalf of Sisterco would not be included in computing the income of Sisterco under subsections 15(1) or (2) because, respectively, on the one hand, Sisterco is not a shareholder of Canco and, on the other hand, Sisterco would not be considered to a have received a loan from or become indebted to Canco.

A non-resident corporation owned by a non-resident individual purchases a Canadian vacation home that is available for use by that individual and family members. CRA found that if no rent is paid, there is a resulting taxable benefit (which, per s. 15(7), can apply even though the corporation is non-resident) and that s. 214(3)(a) deems the benefit to be a dividend paid to the non-resident shareholder by a Canadian corporation for Part XIII tax purposes. CRA stated:

The CRA’s view remains that subsection 15(1) … applies when a non-resident corporation confers a benefit in the form of making available to its non-resident shareholder or to an individual that does not deal at arm’s length with the non-resident shareholder (such as their family members) a property located in Canada.

A wholly-owned foreign subsidiary (FS) of CanCo uses funds generated from its operations to make a non-interest bearing loan to a foreign borrower (FB), which is wholly owned by the foreign parent (FP) of CanCo. The loan is repaid within 2 years so that the upstream loan rules in s. 90(6) do not apply.

(i) Would s. 247 operate to deem interest income to FS which is FAPI to CanCo's income as FAPI; and, if so

(ii) would s. 80.4(2) deem a benefit to arise that is subject to Part XIII tax?

(i) After referring to its “long-standing view that subsection 247(2) could, in general, apply to a transaction between a foreign affiliate and another non-resident person in computing the foreign affiliate's FAPI in respect of a taxpayer, CRA stated:

[S]ubsection 247(2) would apply to adjust the interest income of FS on the loan between FS and FB to reflect an arm’s length rate of interest. The adjusted interest income to FS would be included in its FAPI … .

(ii) CRA stated (building on 2015-0622751I7):

The fact that subsection 247(2) could apply to adjust the interest income of FS on the loan between FS and FB and result in an income adjustment to FS for the purposes of its FAPI computation does not preclude subsection 80.4(2) from applying in respect of FB.

In the present case, subsection 80.4(2) would apply to deem FB to have received a benefit computed based on the prescribed rate under [Reg.] 4301(c) … . Subsection 15(9) deems the subsection 80.4(2) benefit to be a shareholder benefit under subsection 15(1). That shareholder benefit is then deemed to have been paid to FB as a dividend under paragraph 214(3)(a), which is subject to withholding tax under subsection 212(2) [which] FS would be required to withhold and remit … .

CRA also stated that s. 247(12) is inapplicable respecting the “primary adjustments” made in so applying s. 247(2).

A foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. The benefit imputed under s. 80.4(2) from the absence of interest was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, stating:

As the “shareholder” in subsection 15(1), Foreign Sub would be the taxpayer who is deemed to have received the dividend under paragraph 214(3)(a), and it is therefore Foreign Sub who is liable for the withholding tax imposed under subsection 212(2).

Accordingly, Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.

Where a taxpayer pays an intercompany management fee or similar charge and CRA reduces the amount of the deduction under s. 67 ("perhaps on the basis of a different interpretation of reasonableness"), CRA stated that it would allow a written request from the recipient to make a corresponding reduction in the recipient's income, provided that the recipient refunds that amount to the taxpayer.

Where the recipient resides in a treaty country:

[C]ompetent authority assistance may be requested to negotiate offsetting or corresponding adjustments in order to relieve the double taxation. In the case where the unreasonable or excess amount would also give rise to non-resident tax under Part XIII as a deemed dividend pursuant to paragraph 214(3)(a), the taxpayer is provided the option of repatriating the amount that has been disallowed in order to avoid the non-resident tax.

Does s. 214(3)(a) deem a non-resident corporation to pay a dividend (subject to Part XIII tax under s. 212(2)) to its non-resident shareholder where such shareholder uses a property of the corporation in Canada free of charge? After noting that “If the person paid rent to the corporation for the use of the property, the person would be deemed, in respect of that payment, to be a person resident in Canada pursuant to paragraph 212(13)(a),” CRA stated:

[T]he corporation conferred a benefit the value of which, if any, could be included in computing the income of the non-resident person for the purposes of the application of the Act. Indeed, subsection 15(7) makes subsection 15(1) applicable whether or not the corporation has been resident in Canada or has carried on a business there. Thus … subsections 15(1), 212(2) and paragraph 214(3)(a) would be likely to subject the non-resident to Part XIII tax.

Where a loan or royalty agreement between a Canadian and a non-resident does not contain a gross-up clause and the Canadian is assessed under s. 215(6) for failure to withhold, the amount of such tax would not be treated as a payment of interest or a royalty for Part I or XIII purposes and, if the non-resident was a shareholder, would give rise to a deemed dividend subject to Part XIII tax pursuant to ss. 15(1) and 214(3). However, if the non-resident was not a shareholder, s. 56(2) could not be applied because the payment of the tax would not have been included in the income of the non-resident if Part I were applicable, so that s. 214(3)(a) would not apply.

Where a Canadian partnership makes a loan to the U.S. parent of a wholly-owned Canadian resident corporation ("Canco") which is a member of the partnership, the rate of withholding will be 15% as the dividend is not deemed to have been paid by the particular corporation that is a member of the partnership and, therefore, it cannot be said the U.S. parent owns at least 10% of the voting stock of the company paying the dividend.

CRA is not inclined at this time to take the position that standard convertible debentures would in general constitute "excluded debt obligations" pursuant to paragraph 214(8)(c) of the ITA. …In any event, the application of paragraph 214(8)(c) of the ITA in the context of standard convertible debentures becomes academic when the excess determined under subsection 214(7) of the ITA does not constitute "participating debt interest" and the issuer and holders of the convertible debentures deal at arm's length.

In our view, pursuant to subsection 261(2) of the Act, the discount and yield tests set out in paragraph 214(8)(c) of the Act for a non-convertible, non-exchangeable, foreign currency denominated obligation are to be carried out by converting each of 'the amount for which the obligation was issued' and the 'principal amount' into Canadian currency using the relevant spot rate for the day of issue. Therefore, in our view, fluctuation in the value of a foreign currency affecting the Canadian dollar value of [the obligation], originally issued without a discount, would not result in the obligation being an excluded obligation under paragraph 214(8)(c) of the Act.

A demand interest-bearing promissory note would qualify as an excluded obligation because it was not issued at a discount.

In order to obtain the agreement of arm’s length non-resident financial institutions to a sale of the shares of Canco to the non-resident purchaser, Canco paid “Consent Fees” to them, which were calculated as a percentage of the amount owing under each Credit Agreement. In finding that the Consent Fees were not management fees, the Directorate stated:

Respecting whether the Consent Fees would be deemed interest under s. 214(15), the Directorate stated:

Paragraph 214(15)(a) only applies to guarantee fees.

In any case, since Canco and the Lenders are at arm’s length, the Consent Fees would not be subject to Part XIII tax because of subparagraph 212(1)(b)(i) even if subsection 214(15) deemed them to be interest.

A corporation with a June 30 taxation year end makes monthly payments of interest on a loan from its non-resident parent, and remits withholding tax to CRA each month. In its annual return it recognizes that by virtue of s. 18(4) the interest is non-deductible and is deemed to be a dividend – and with the Treaty-reduced rate of withholding being less that the rate at which Part XIII tax actually was withheld. The NR-7 form permits the recovery of excess withholding, but only on the basis of a calendar year filing. What procedure should be followed in order to recover the excess withholding tax?

Before indicating that the excess withholding could only be recovered under s. 227(6) through filings made on a calendar year basis, CRA noted that s. 214(16)(b) allowed “for flexibility and certainty with respect to the corporation’s withholding and payment obligations in respect of the amounts of such deemed dividends during a taxation year,” therefore apparently implying that the withholding tax rate reduction under s. 214(16)(b) could be anticipated at the time of making the interest payments.