CRA appears to address whether withholding on interest subject to the thin cap rules can take into account a subsequent s. 214(16)(b) designation
We will be publishing the October 5, 2018 APFF Roundtable on a piecemeal basis over the next week or so as we summarize the questions posed and prepare full-text translations of the CRA preliminary written answers.
A corporation with a June 30 taxation year end makes monthly payments of interest on a loan from its non-resident parent that it treats as being subject to Part XIII withholding of 15% - but when it files its annual return, it recognizes that some of such interest was deemed under s. 18(4) and s. 214(16)(a) to be dividends subject to a 5% withholding tax rate. CRA effectively indicated that once the excess withholding was made, the only way to get it back was to file an NR-7, which is only filed on an annual basis. However, CRA also noted that in its annual return the corporation could make s. 214(16)(b) designations as to which of the interest payments were deemed to be dividends, and stated that s. 214(16)(b) thus allows:
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.
The implication may be that the corporation can guess during the year as to which interest payments it will subsequently designate to have been dividends and withhold at the lower rate accordingly. This is analogous to the modus operandi of some income funds and REITs, whose income distributions are subject to Part XIII tax and whose capital distributions are not subject to Part XIII.2 tax, and who must estimate what portion of their monthly distributions will turn out to have been income that was subject to withholding based on their annual results.