10 January 2001 External T.I. 2000-0007835 - EXEMP FROM WITHHOLDING TAX ON INTEREST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether proceeds from an asset sale that are required to be used to reduce the principal of the loan or to be put on deposit with the lender would be acceptable thus allowing the interest on the loan to be exempt from withholding under subparagraph 212(1)(b)(vii).

2. Would offer and acceptance to repay more than 25% of the principal of the loan as a result of a "triggering event" preclude the application of the exemption in subparagraph 212(1)(b)(vii)?

Position:

1. No

2. Yes

Reasons:

1. The borrower may be obliged to repay more than 25% of the principal within five years of the date of issue.

2. The "triggering event" would not, in and by itself, preclude the withholding tax exemption.

XXXXXXXXXX 2000-000783
N. L. Storry

Attention:

January 10, 2001

Dear Sirs:

Re: Withholding Exemption on Interest Paid to Non-Resident Lender

This is in response to your letter dated February 11, 2000, wherein you requested our views regarding the withholding tax exemption pursuant to subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act") and whether the occurrence of specific events would contravene this exemption.

In the hypothetical situation you described, a non-resident makes a loan to a Canadian borrower. All of the circumstances surrounding the loan meet the requirements of subparagraph 212(1)(b)(vii) of the Act, with one potential exception. The Canadian borrower has certain assets, and there is a clause in the loan agreement that specifies that if any of these assets are sold, then the proceeds of the sale are required to be applied against the loan. The sale of the asset is not listed as a default under the loan.

In this situation, it is our view that the borrower may be obliged to repay more than 25% of the principal within five years of the date of issue thereby precluding the application of the withholding tax exemption pursuant to subparagraph 212(1)(b)(vii) of the Act. Our view would be the same if, instead of requiring the proceeds of the asset sale to be applied against the loan, the borrower is required to deposit the proceeds with the lender.

If, however, upon the sale of the asset the borrower is required to make an offer to repay the loan and the failure to make the offer is defined as a default under the terms of the loan, the asset sale would be considered a "triggering event" that would not cause the exemption in 212(1)(b)(vii) to be denied. Therefore, it is our opinion that an offer and acceptance to repay more than 25% of the principal of the loan as a result of such a "triggering event" would not, in and by itself, preclude the application of the exemption in subparagraph 212(1)(b)(vii) of the Act. To be acceptable, "triggering events" and "events of failure or default" must have commercial reality, must be beyond the control of the lender and must not be contrived.

We trust these comments will be of assistance.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch