22 September 2000 Internal T.I. 2000-0036897 - Interest on pay equity & tax refunds

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 interest on pay equity settlements (and also interest on tax refunds) paid to non-resident individuals is subject to Part XIII tax under paragraph 212(1)(b) of the Act.

2. Whether such interest payments are exempt from Part XIII tax under 212(1)(b)(ii)(C)(I) of the Act.

3. Whether such interest payments are exempt from tax in Canada under the interest article of the following income tax conventions which contain an exemption in respect of indebtedness of the government of Canada: Denmark; Iceland; India; Italy; Kazakhstan; Luxembourg; Mexico; Russia; South Africa; Sweden; Switzerland; Trinidad and Tobago; Ukraine; USA; and Vietnam.

Position:

1. Yes
2. No
3. yes in all conventions except the present Luxembourg convention

Reasons:

1. Such payments constitute interest payments under the Act and under Canada's conventions.

2. The interest exemptions described in subclause 212(1)(b)(ii)(C)(I) of the Act do not apply as the interest payable on pay equity settlements and tax refunds are not payable on a bond, debenture, note, mortgage or similar obligation issued by the Government of Canada. See IT-155R3 -Paragraph 7.

		September 22, 2000

	Lynn Keller	International Section
	Manager	G. Middleton
	Part XIII Withholding Section	957-2122
	International Tax Directorate

	Attention:  Sylvie Cloutier
		2000-003689

Interest payable on Pay Equity Settlements

This is in reply to your memorandum of July 7, 2000 and further to our recent telephone conversations (Middleton/Cloutier), concerning Part XIII withholding requirements on interest paid to non-residents of Canada by Public Works in respect of interest payable on pay equity settlements ("pay equity interest"). You also requested our views as to whether income tax refund interest payments made to non-residents of Canada would be subject to the same Part XIII withholding requirements.

Based on our understanding of the facts, pay equity interest constitutes interest for purposes of the Act and, thus, pay equity interest payments to be made by Public Works to non-residents are subject to Part XIII tax pursuant to paragraph 212(1)(b) of the Act. The interest exemptions described in subclause 212(1)(b)(ii)(C)(I) of the Act do not apply as the interest payable on pay equity settlements is not interest payable on a bond, debenture, note, mortgage or similar obligation issued by the Government of Canada. As described in paragraph 7 of Interpretation Bulletin IT-155R3, the tax treatment for refund interest is the same as the tax treatment for pay equity interest.

Pay equity interest (and refund interest) fall under the meaning of "interest" in the income tax conventions ("conventions") that Canada has entered into with other countries and the payments of such interest amounts to individuals are usually dealt with under the Interest Article in the conventions.

You listed 15 countries which have an Interest Article in their conventions with Canada and each Interest Article contains a paragraph which deals with interest paid in respect of indebtedness of a government of a Contracting State ("CS"). The 15 countries and conventions with Canada are as follows: Denmark; Iceland; India; Italy; Kasakhstan; Mexico; Russia; South Africa; Sweden; Switzerland; Trinidad and Tobago; Ukraine; United States; Vietnam; and Luxembourg.

With respect to the first 14 of these conventions with Canada (i.e. other than Luxembourg), pay equity interest, and refund interest, payments made to residents of those countries are exempt from tax in Canada by virtue of the paragraph in the Interest Article of those conventions which deals with interest paid in respect of indebtedness of the Government of Canada. The specific wording for such paragraphs in the Interest Article of those 14 conventions is as follows:

Denmark

Article 11(4)(a)- "...interest arising in a CS and paid in respect of indebtedness of the government of that CS or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other CS, be taxable only in that other CS;"

Iceland

Article 11(3)(a) - "....interest arising in a CS and paid in respect of indebtedness of the government of that State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other CS, be taxable only in that other State"

India

Article 11(3)(a) - "....interest arising in a CS and paid to a resident of the other CS shall be exempt from tax in the first-mentioned State if

(i) the payer of the interest is the Government of that CS or of a political subdivision or local authority thereof;"

Italy

Article XI(3)(a) - "....interest arising in one of the CS shall not be taxable in that State if:

(i) the payer of the interest is that CS or a political or administrative subdivision or local authority thereof;"

Kazakhstan

Article 11(3)(a) - "....interest arising in a CS and paid in respect of indebtedness of the Government of that State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other CS, be taxable only in that other State"

Mexico

Article 11(3). "Notwithstanding the provisions of paragraph 2,

(a) interest arising in a Contracting State may be taxed only in the other Contracting State where the beneficial owner is a resident of that other State and the person paying the interest .....is the Government of a Contracting State or a political subdivision or local authority thereof;"

Russia

Article 11(3). "Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner thereof shall be taxable only in that other State if it is paid:.....

(b) to a resident of that other State in respect of indebtedness of the first-mentioned State or of its state authorities, including local authorities thereof;"

South Africa

Article 3. "Notwithstanding the provisions of paragraph 2:

(a) interest arising in Canada and beneficially owned by a resident of South Africa shall be taxable only in South Africa if it is paid:

(i) in respect of indebtedness of the government of Canada or of a political subdivision or local authority thereof;"

Sweden

Article 11(4). "Notwithstanding the provisions of paragraph 2:

(a) interest arising in a Contracting State and paid in respect of indebtedness of the government of that State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other State;"

Switzerland

Article 11(4). "Notwithstanding the provisions of paragraph 2,

(a) interest arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner thereof shall be taxable only in that other State if it is paid in respect of indebtedness of the government of the first-mentioned State or of a political subdivision or local authority thereof;"

Trinidad and Tobago

Article 11(3). "Notwithstanding the provisions of paragraph 2:

(a) interest arising in a Contracting State and paid in respect of indebtedness of the government of that State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other State;"

Ukraine

Article 11(3). "Notwithstanding the provisions of paragraph 2:

(a) interest arising in a Contracting State and paid in respect of indebtedness of the government of that State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other State;"

United States

Article XI(3). "Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State if:

the interest is beneficially owned by a resident of the other Contracting State and is paid by the first-mentioned State, a political subdivision or local authority thereof or an instrumentality of such first-mentioned State;"

Exception - Luxembourg

Paragraph 3(a) of Article 11 of the present Canada-Luxembourg Income Tax Convention reads as follows:

"Notwithstanding the provisions of paragraph 2,

(a) interest arising in a Contracting State and paid in respect of a bond, debenture or other similar obligation of the government of that Contracting State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other State;"

Pay equity interest, and refund interest, payments are not "paid in respect of a bond, debenture or other similar obligation of the government of" Canada. The rationale for this is the same as set out above in the second paragraph of this memo concerning subclause 212(1)(b)(ii)(C)(I) of the Act. Accordingly, such payments made to a resident of Luxembourg do not qualify for the exemption set out in paragraph 3(a) of Article 11 at the present time.

A new Canada-Luxembourg Income Tax Convention was signed on September 10, 1999 but it is not yet in force. Paragraph 3(a) of this new Convention has been reworded to read as follows:

"Notwithstanding the provisions of paragraph 2,

(a) interest arising in a Contracting State and paid in respect of indebtedness of the government of that Contracting State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other State;

Beginning in the year in which this new Convention enters into force, pay equity interest, and refund interest, payments made to a resident of Luxembourg will be exempt from tax in Canada by virtue of this paragraph together with paragraph 2(a) of Article 29 of the new Convention.

We have not reviewed the Interest Article provisions in Canada's other conventions. However, if another convention contains a provision similar to paragraph (3)(a) of Article 11 of the present Luxembourg Convention as set out above, pay equity interest, and refund interest, payments would not be exempt from Canadian tax by virtue of such a provision.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch