CRA no longer imputes interest on mismatched cross-border swap payments

At 1984 CTF Roundtable, Q.60, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.

CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247. CRA gave a similar response at 5 September 2020 IFA Roundtable, Q.2

CRA also stated that “CRA considers that all amounts payable or receivable under the terms of a swap agreement are on account of income and are to be included or deducted under section 9.” This is an over-simplification – for example, CRA would recognize that on a cross-currency swap hedging an FX borrowing, the hedge of the principal component generally would be on capital account.

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable, Q. 16, 2020-0867071C6 F under s. 16(1) and s. 9 – capital gain vs. profit – swaps.