Adverse thin cap impact of automatic grind under s. 212.3(7) (p. 10)
While PUC reduction is generally preferable to a withholding tax cost, there are circumstances in which taxpayers may prefer to pay the withholding tax. PUC, after all, goes into the equity base for determining whether subsection 18(4) limits the deductibility of related-party interest expense. If a joint Committee recommendation that taxpayers should be permitted to elect to be subject to withholding tax is accepted, the election will, presumably, be available to deal with those situations in which taxpayers would have chosen to pay withholding tax rather than realize a PUC reduction. As currently drafted, however, taxpayers may find unanticipated PUC reductions imposed upon them because this change is to be effective from the 2012 Budget date. Presumably Finance views it as a relieving measure, but there may be situations in which it is not.
Potential desirability of triggering withholding tax under s. 84(1) (p. 10)
Taxpayers should be sensitive to the potential for double taxation resulting from a withholding tax liability arising as a consequence of the application of the FAD rules. If there is insufficient PUC to shelter the CRIC (and its shareholders) from a withholding tax liability, it may be logical to increase stated capital (and PUC) immediately before the investment time. The same withholding tax liability would presumably arise as a result of the PUC increase, but the result is that the CRIC would potentially have access to a future PUC reinstatement under subsection 212.3(9), should the conditions of that provision be met. Perhaps Finance could amend subsection 212.3(9) to provide for such a result and eliminate the need for self-help. Such a change would be consistent with the general liberalization of the PUC reduction and reinstatement regime.
Email this Content