Section 214

Subsection 214(1) - No deductions

Administrative Policy

93 C.P.T.J. - Q.27

Royalties earned by non-residents not carrying on business in Canada from Canadian resource properties are subject to withholding tax under s. 212(1)(d) on the gross amount of the royalties before any deduction in respect of Crown charges.

Subsection 214(3) - Deemed payments

Paragraph 214(3)(a)

Cases

Gillette Canada Inc. v. The Queen, 2001 DTC 895 (TCC)

The taxpayer (a Canadian subsidiary of a U.S. corporation ("Gillette Boston")) contributed a 9.9% interest in a French partnership that was 90% owned by Gillette Boston, to a French subsidiary ("Oral B France") in consideration for shares. The partnership repurchased the partnership interest held by Oral B France in exchange for a note, Oral B France repurchased the shares in its capital held by the taxpayer in exchange for an assignment of the note, and the note was converted into a loan with the loan not being repaid until almost five years later.

Rip T.C.J. found that s. 214(3)(a) did not apply to deem there to be a payment in respect of the loan owing to the taxpayer because s. 214(3)(a) did not apply to amounts owing by a partnership.

See Also

Minet Inc. v. The Queen, 96 DTC 1405 (TCC)

O'Connor TCJ. accepted the taxpayer's submission that ss.214(3)(a) and 56(2) could not be applied to impose Part XIII tax where a Canadian resident conferred a benefit on a non-resident person. The "taxpayer" referred to in s. 214(3)(a) is a non-resident.

Florsheim Inc. v. The Queen, 95 DTC 110 (TCC)

The taxpayer was subject to liability for Part XIII tax pursuant to ss.80.4(2), 15(9), 214(3)(a), 215(6) and 227(10.1) in respect of interest-free loans made by it to its U.S.-resident parent notwithstanding submissions to the effect that ss.214(3) and (3.1) were too vaguely worded to accomplish this result.

Industries P.W.I. Inc. v. MNR, 93 DTC 852 (TCC)

An interest-free loan made by the taxpayer to a non-resident corporate shareholder was subject to Part XIII tax. The taxpayer unsuccessfully argued that the phrase "if Part I were applicable" should be interpreted as indicating that the non-resident corporation should be treated as a resident Canadian corporation for purposes of considering the rules in s. 15(2).

Administrative Policy

16 August 2017 Internal T.I. 2015-0622751I7 - Part XIII Tax on Benefit to Non-resident

benefit from interest free loan by CFA to Canco sister deemed to be a dividend subject to Pt XIII tax

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(9) s. 15(9) applies to interest-free loan between two foreign affiliates 257
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) use of s. 160 to collect s. 15(9) liability of indirect FA on dividends paid to Canco 269
Tax Topics - Income Tax Act - Section 215 - Subsection 215(1) CFA liable for failure to "withhold" and remit Pt XIII tax on interest-free benefit on loan to NR sister of its Cdn grandparent 122
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) s. 227.1 liability can extend to NR directors of a CFA 168
Tax Topics - Income Tax Act - Section 80.4 - Subsection 80.4(2) extra-territorial application of s. 80.4(2) 132

19 October 2012 External T.I. 2012-0440071E5 - Section 67 of the Income Tax Act

corresponding adjustment to recipient

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67 correlative income reduction to recipient where s. 67 denial 152

5 October 2012 Roundtable, 2012-0451241C6 F - Benefit conferred on a NR shareholder by a NR corp

gratuitous use by NR shareholder of Canadian property of the NR corporation produces a s. 214(3)(a) deemed dividend

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(7) s. 15(7) assists in determining that s. 15 can apply to the NR shareholder of a NR corporation gratuitously using the corporation’s Canadian property 61
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) s. 247(2) could apply to produce s. 212(1)(d) withholding where the NR shareholder of a NR corporation gratuitously uses Canadian corporate property 80

19 November 1999 TI 973234

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.

IT-119R4,"Debts of Shareholders and Certain Persons Connected with Shareholders", 7 August 1998

No penalty if tax remitted by Feb 15/based only on net annual increase in balance

38 ....If there is no series of loans or other transactions and repayments (see ¶ 28 above), the non-resident who has received a loan in a particular taxation year cannot be deemed to have received a dividend until one year after the end of the taxation year of the lender, in order to determine if the exception under subsection 15(2.6) applies. Consequently, it is the Department's practice, in these circumstances, not to levy a penalty and not to charge interest in respect of the requirement for remittance of the tax, provided that the tax is remitted on or before the 15th day of the 13th month following the end of the taxation year of the lender in which the loan was made (if the tax is not remitted by this day, interest will start accruing as of the 16th day of the 13th month). If there is a series of loans or other transactions and repayments ... the tax is based on the net increase of the loan during the taxation year of the lender.

Articles

Michael N. Kandev, "NIB Loan to Non-FA-Related Non-Resident", Canadian Tax Highlights, Vol.26, No. 4, April 2018, p. 5

Interest-free loan from a CFA of Canco to a NR sister of Canco

2015-0622751I7 … analyzed the tax consequences of a foreign parent, its wholly owned Canadian holdco, and the Canadian holdco's Canadian subsidiary (Canco). Foreign Parent also has a foreign subsidiary (Foreign Sub) that is not an FA of Canco or Canadian Holdco. Canco holds an interest in Opco, which is an FA of Canco and Canadian Holdco. Opco uses funds generated from its operations to make an equity investment in Finco, another FA of Canco and Canadian Holdco; Finco uses the funds to make a non-interest-bearing loan to.Foreign Sub. The loan is repaid within two years…

Finding of imputed benefit subject to Pt XIII tax (p. 5)

[S]ubsection 80.4(2) applied to deem Foreign Sub to have received a benefit in an amount computed using the prescribed rate; subsection 15(9) provides a deeming rule that invokes the shareholder benefit rule in subsection 15(1)….

The CRA then said that the "shareholder" for the purposes of subsection 15(1) was Foreign Sub, which was thus the taxpayer deemed to have received the dividend under paragraph 214(3) (a) and thus liable for the part XIII tax under subsection 212(2)….

Whether “corporation resident in Canada” is descriptive or deeming/extraterritorial reach (p. 6)

Foreign Sub is not liable to part I tax (see subsection 15(7), if it were), and part XIII tax should not apply either. The CRA relied on paragraph 214(3)(a), which deems the section 15 benefit to "have been paid to the taxpayer as a dividend from a corporation resident in Canada"; arguably, this provision should not be read as deeming Finco to be "a corporation resident in Canada"; it only restates the basic (resident payer) requirement of part XIII after deeming the benefit to be a dividend in order to engage subsection 212(2). If Parliament had intended to apply withholding tax to this clearly extraterritorial situation, it would have deemed Finco to be a person resident in Canada in respect of the benefit conferred on Foreign Sub under subsection 212(13). Absent such explicit provision, basic principles of territoriality dictate that Canada cannot tax the amount (Oceanspan )

Subsection 214(7) - Sale of obligation

Administrative Policy

14 January 2011 External T.I. 2004-0098601E5 - Foreign currency borrowings and ss 214(7) and (8).

FX movements can cause deemed interest

A foreign currency debt obligation must, pursuant to s. 261(2), be converted to Canadian currency for the purposes of determining "the price for which the obligation was transferred" and "the price for which the obligation was issued" under s. 214(7). The conversions must use the relevant spot rate for the day of transfer and issue, respectively. Therefore, an increase in the Canadian dollar value of the other currency between those two days can lead to a deemed interest payment under s. 214(7) if the obligation is not an excluded obligation.

1 May 2009 IFA Roundtable Q. 12, 2009-0320231C6 F - Convertible Debt Obligations

no deemed interest on conversion of traditional convertible debenture

Traditional convertible debentures are: unsecured subordinated of a public corporation issued in Canadian dollars for their face value; bear interest (payable at least annually) at a fixed rate; provide a fixed conversion price (or ratio) in excess of the current market price on the issue date; and are redeemable by the issuer at the face value, plus accrued and unpaid interest, on the specified maturity date. CRA stated:

Where there is a conversion of a traditional convertible debenture by its original holder for common shares of the issuer, … in general there would be no Excess under subsection 214(7)… . Accordingly, no amount is deemed to be a payment of interest by the issuer (person resident in Canada) to the non-resident person for the purposes of Part XIII. For the purpose of paragraph 214(7)(d) of the ITA, the price for which the traditional convertible debenture is assigned on the conversion, is the amount determined by multiplying the fixed conversion price by the number of shares received on the conversion, that is, an amount corresponding to the face value of the traditional convertible debenture.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest no deemed interest on conversion of traditional convertible debenture 181

Income Tax Technical News, No. 41, 23 December 2009 Under "Convertible Debt", Q. 2

convertible premium taints all other interest

The amount considered to be repaid on the conversion of a convertible debenture generally will be the stated capital of the shares issued.

If a particular premium on a convertible debt obligation represented participating debt interest, all interest on the obligation would be participating debt interest under an initial analysis of the CRA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest convertible premium taints all other interest 30

88 C.R. - "Finance and Leasing" - "Interest" - "Amounts Paid on Redemption of Bonds or Purchase of Bonds in the Open Market"

The purchase on the open market by the issuer of a bond held by a non-resident is deemed to be a payment of interest subject to the provisions of s. 212(1)(b) unless it is an excluded obligation.

Articles

David W. Ross, "Convertible Debentures - Principal Amount", Resource Sector Taxation, (2006) Vol. IV, No. 2, p. 280.

Subsection 214(7.1) - Idem [Sale of obligation]

Articles

Broadhurst, "Financing by Non-Residents", 1992 Corporate Management Tax Conference Report, p. 9:19

In the writer's view, s. 214(7.1) does not apply to a non-resident who purchases trade receivables from a Canadian vendor, then resells the trade receivables back to the Canadian resident.

Subsection 214(8)

Paragraph 214(8)(a)

Administrative Policy

88 C.R. - "Finance and Leasing" - "Withholding Tax"

Finance recognizes the anomaly that, unlike the s. 212(1)(b)(vii) exemption, the definition of excluded obligation does not recognize supervening illegality clauses.

Related Provisions

Exemption in former s. 212(1)(b)(vii):

(vii) interest payable by a corporation resident in Canada to a person with whom that corporation is dealing at arm's length on any obligation where the evidence of indebtedness was issued by that corporation after June 23, 1975 if under the terms of the obligation or any agreement relating thereto the corporation may not under any circumstances be obliged to pay more than 25% of

  • (A) where the obligation is one of a number of obligations that comprise a single debt issue of obligations that are identical in respect of all rights (in equity or otherwise, either immediately or in the future and either absolutely or contingently) attaching thereto, except as regards the principal amount thereof, the total of the principal amount of those obligations, or
  • (B) in any other case, the principal amount of the obligation,

within 5 years from the date of issue of that single debt issue or that obligation, as the case may be, except

  • (C) in the event of a failure or default under the said terms or agreement,
  • (D) if the terms of the obligation or any agreement relating thereto become unlawful or are changed by virtue of legislation or by a court, statutory board or commission,
  • (E) if the person exercises a right under the terms of the obligation or any agreement relating thereto to convert the obligation into, or exchange the obligation for, a prescribed security,
  • (F) in the event of the person's death, and
  • (G) in the event that a change to this Act or to a tax treaty has the effect of relieving the non-resident person from liability for tax under this Part in respect of the interest;

See authorities on s. 212(1)(b)(vii) under that heading.

Paragraph 214(8)(c)

Administrative Policy

26 November 2013 Annual CTF Roundtable, 2013-0509061C6 - Part XIII Tax & Standard Convertible Debentures

interest and premium on standard convertible debenture not participating

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest interest and premium on standard convertible debenture not participating 105

14 January 2011 External T.I. 2004-0098601E5 - Foreign currency borrowings and ss 214(7) and (8).

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 214 - Subsection 214(15) 91
Tax Topics - Income Tax Act - Section 214 - Subsection 214(7) FX movements can cause deemed interest 87
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) principal amount converted at historical rate 105

Income Tax Technical News, No. 41, 23 December 2009 Under "Convertible Debt"

"The sole fact that the fair market value of the shares issued on conversion exceeds the issue price of the convertible debt obligation is not, per se, determinative, where the issuer must repay the obligation for an amount equal to the issue price."

13 December 1995 T.I. 953013 (C.T.O. "Meaning of 'Excluded Obligation'")

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

Articles

Julie Colden, "Implications of Imperial Oil", Canadian Current Tax, Vol. 15, No. 3, December 2004, p. 21.

Subsection 214(15) - Standby charges and guarantee fees

Cases

R. v. Melford Developments Inc., 82 DTC 6281, [1982] CTC 330, [1982] 2 S.C.R. 504

In the absence of this provision, "interest" in Part XIII would refer primarily to "the payment of rent by a borrower for the use of the principal of the lender to whom the rent is paid". However, in the absence of the overriding effect of any Convention, the effect of s. 214(15) is to convert guarantee fees into "interest" for the purpose of the withholding tax provisions of that Part.

Words and Phrases
interest

Administrative Policy

14 January 2011 External T.I. 2004-0098601E5 - Foreign currency borrowings and ss 214(7) and (8).

A foreign currency debt obligation must, pursuant to s. 261(2), be converted to Canadian currency for the purposes of determining "the price for which the obligation was transferred" and "the price for which the obligation was issued" under s. 214(7). The conversions must use the relevant spot rate for the day of transfer and issue, respectively. Therefore, an increase in the Canadian dollar value of the other currency between those two days can lead to a deemed interest payment under s. 214(7) [if the obligation is not an excluded]. [no comments except for addition]

6 May 2003 External T.I. 2003-001414 -

A letter of credit fee paid by the taxpayer to a foreign bank for providing documentary letters of credits in respect of an importation of goods by the taxpayer would not be deemed to be interest.

26 November 1996 T.I. 963464 (C.T.O. "Standby and Funding Fees")

"Where a funding fee is paid in respect of a term loan which satisfies all the requirements of subparagraph 212(1)(b)(vii) of the Act so that the interest on the loan would not be subject to withholding tax, the funding fee is also not subject to withholding tax under Part XIII regardless of whether it is paid at the beginning or the end of the term of the loan."

In the case of revolving loans, standby fees and funding fees that are considered to relate to an exempt loan (i.e., a drawdown that is evidenced by a promissory note and that is not payable for five years) also will be exempt from withholding tax.

90 C.R. - Q.47

When a Canadian corporation borrows funds from an arm's length lender and its non-resident parent guarantees the loan for no consideration, the parent will not be deemed to have been paid interest on the loan because it did not receive consideration for its guarantee. However, if the Canadian corporation's borrowing of funds or the giving of the guarantee can be considered to be part of the series of transactions which results in a tax benefit and may reasonably be considered to have been undertaken or arranged primarily to obtain a tax benefit, the transaction nonetheless may be subject to s. 245(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) 39

88 C.R. - F.Q.25

A guarantee fee received by a wholly-owned non-resident subsidiary of the borrower under a s. 212(1)(b)(vii)-exempt loan for guaranteeing the repayment of that loan, will be deemed to be a payment of interest which is not exempt from Part XIII tax.

Articles

Loveland, "Income Tax Impediments to Foreign Investment in Canada", 1982 Conference Report, p. 666 at pp. 690-693.

Paragraph 214(15)(b)

Administrative Policy

30 March 2017 Internal T.I. 2016-0636721I7 - Consent fees and withholdings

whether consent fee was deemed to be interest under s. 212(15)(b) was moot

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(4) - Paragraph 212(4)(a) consent fee was not for “advice or direction pertaining to the operation or administration of a company” 153
Tax Topics - Income Tax Regulations - Regulation 105 - Subsection 105(1) non-resident dealer who attended at Canadian board meetings was rendering services in Canada 168

Subsection 214(16) - Deemed dividends

Administrative Policy

5 October 2017 Internal T.I. 2015-0614021I7 - 214(16) deemed dividend

Interest that is denied under the thin cap rules and recharacterized as dividends is still interest for FAPI and LRIP/GRIP purposes

A portion of the interest paid by CanCo to ForCo, which is a controlled foreign affiliate of the Canadian parent of CanCo, is not deductible pursuant to s. 18(4) and is deemed by s. 214(16) to have been paid as a dividend. CanCo designated one of the interest payments under s. 214(16)(b) to be a dividend. Should CanCo make corresponding adjustments to its low rate income pool (“LRIP”) or general rate income pool (“GRIP”) (as applicable) at the time the deemed dividend is paid; and is the amount received by ForCo a dividend rather than interest so as to be excluded from the foreign accrual property income (“FAPI”) of ForCo? The Directorate stated:

Even though the definition “taxable dividend” applies for the purposes of the Act, the interest paid or credited under subsection 214(16) is deemed [under the s. 214(6) preamble] to have been paid as a dividend solely for the purposes of Part XIII and, accordingly, it is considered to be a “taxable dividend” solely for the purposes of Part XIII. Therefore … CanCo’s LRIP/GRIP balances (as applicable) would not be affected [and] subsection 214(16) would not alter the character of the income received by ForCo for FAPI purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Property Income - Paragraph (b) s. 214(16) does not recharacterize interest as dividends for FAPI purposes 101

23 May 2013 IFA Round Table Q. 7

Where a portion of the interest payable by Canadian subsidiary (Canco) on loans from its US Parent and a UK sister company is denied under the thin capitalization rules and deemed to be a dividend, can Canco allocate the deemed dividend first to US-Co (subject to 5% dividend withholding) rather than to UK-Co (a 15% rate)?

Response

S. 214(16)(b) allows the corporation resident in Canada to designate all or a portion of each specific interest payment to a particular non-resident as a dividend, to the extent of the total amount of the interest payments to that non-resident that were otherwise deemed to be a dividend under s. 214(16)(a), thereby effectively allowing the corporation to determine the timing of the deemed dividends for Part XIII purposes. However, the paragraph does not allow the corporation to transfer a deemed dividend from one payee to another, to alter amounts paid to a specified non-resident, or to affect the timing of amounts paid.

Example

Assume that throughout the year, Canco in the above example has $1,000 in paid-up capital and no other equity, and owes $1,000 to US-Co (its parent) bearing interest at 7% (paid as to $35 at the end of each of Q2 and Q4), and owes $1,000 to UK-Co (a sister) bearing interest at 5% ($25 at the end of Q2 and Q4).

$500 (or 25%) of this debt exceeds the thin capitalization limit of 1.5-to-1. Accordingly, 25% of each of the above interest payments would be deemed to be a dividend absent a designation under s. 214(16)(b). If Canco instead designates $17.50 of its fourth quarter US-Co interest payment to be a dividend (i.e., 25% of total US-Co interest of $70), and $12.50 of its fourth quarter UK-Co interest payment to be a dividend (25% of $50), the imposition of Part XIII tax will be deferred to the end of Q4.

Paragraph 214(16)(a)

Articles

Carrie Smit, "Thin Capitalization Amendments – Denied Interest May be Subject to Withholding Tax", CCH, Tax Topics, No. 2114, September 13, 2012, at p. 3.

It should be considered whether loans may be transferred among lenders prior to a particular interest payment (or prior to year end in the case of accrued and unpaid interest), in order to access a lower rate of withholding tax. For example, assume a U.S. company ("USco") owns all the shares of a Canadian company ("Canco"), and USco's wholly owned U.S. subsidiary ("Financeco") has made a loan to Canco. Any denied interest paid to Financeco that is recharacterized as a dividend would be subject to a 15% Canadian withholding tax, as Financeco does not own 10% or more of the voting stock of Canco. However, if Financeco were to transfer the loan to USco prior to the interest payment, the 5% rate may be applicable. [Fn. 9: Neither subsection 214(6) nor (7) should apply to this transfer, as it is a transfer between non-residents.] A transfer of the loan by Financeco to another Canadian corporation before the interest payment may not be beneficial. Draft paragraph 214(17)(b) provides that where a debt is transferred in circumstances where subsection 214(6) or (7) applies to deem a payment of interest, the Canadian corporate debtor is deemed to have paid the unpaid interest to its non-resident creditor immediately before the transfer. [Fn. 10: Draft paragraph 214(17)(b) was not part of the Budget proposals and only applies on or after August 14, 2012.]

Turning to the extension of the thin capitalization rules to debts owing by partnerships:

… a Canadian corporate member of a partnership will be deemed to owe its proportionate share of all partnership debt, and the thin capitalization rules will apply to the extent that such debt is owed to a specified lender in respect of the corporation. If the corporation's thin capitalization limits are exceeded, the corporation will be required to include an amount into income to effectively offset the "tainted" interest deduction.

Where such an income inclusion results, the corresponding interest paid or credited by the partnership is deemed to have been paid by the corporation as a dividend (and not to have been paid by the partnership as interest). Accordingly, it is the Canadian corporation that will have the obligation to withhold and remit the applicable withholding taxes. This can cause practical issues where the Canadian corporation itself has no funds or is only a minority member of the partnership. The partnership may not be aware of the thin capitalization position of its Canadian corporate members and therefore, may not know whether it needs to withhold on its interest payments. If the partnership does withhold on interest in a situation where draft paragraph 214(16)(a) applies, the specified lender will need to apply for a refund of any excess withholding tax.

Paragraph 214(16)(b)

Administrative Policy

5 October 2018 APFF Roundtable Q. 1, 2018-0768721C6 F - Procedure re: refund of excess w/h under Part XIII

whether withholding on interest subject to the thin cap rules can take into account a subsequent s. 214(16)(b) designation

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227 - Subsection 227(5) withholding on interest that does not reflect the benefit of a subsequent s. 214(16)(b) designation can be recovered only on a s. 227(5) annual basis 237