22 November 2000 External T.I. 2000-0046375 - WITHHOLDING TAX ON INDEX LINKED DEBT

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: Whether interest computed by reference to a stock index is considered to be computed by reference to revenue, profit, cash flow, commodity price or similar criterion as per postamble to 212(1)(b).

Position: Generally no - but there may be exceptions

Reasons: Depends how closely linked the index is to the business of the issuer

XXXXXXXXXX 								2000-004637
J. P. Dunn
Attention:  XXXXXXXXXX 

November 22, 2000

Dear Sirs:

Re: Withholding Tax on Index Linked Debt Obligations

We are writing in response to your correspondence of September 18, 2000 concerning the imposition of withholding tax pursuant to paragraph 212(1)(b) of the Income Tax Act (the "Act") on amounts paid to non-residents as interest on debt obligations. In the particular case which is the subject of your enquiry, the return paid on the debt obligation is computed by reference to the change in an internationally recognized foreign stock index. There would be no return to the investor in the event that there was no change in the reference index or if that index declined over the term of the obligation. You have asked whether the computation of the return by reference to the stock index would be viewed by the Agency as being "computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion", as described in the postamble to paragraph 212(1)(b) of the Act, with the result that the amount would not be considered to be "interest" for the purposes of that provision.

The Agency would not generally consider the return computed by reference to a stock index to be so computed as long as the Agency is satisfied that the particular index chosen is not influenced by the inclusion in that index of the shares of the issuing corporation, corporations related to the issuing corporation or a corporation or corporations whose primary business is substantially similar to that of the issuing corporation. Such an influence could lead to a conclusion that changes in the index represent a "similar criterion" for the computation of interest by reference to revenue, profit, cash flow or commodity price as described in the aforementioned postamble.

Also, the Agency would want to be satisfied that the debt obligation is not used by a non-resident of Canada as a substitute for a direct investment in the underlying securities in an index where dividends or gains on those securities would be subject to tax in Canada if held directly by that non-resident. This would not appear to be of concern in the situation presented by you as the return on the obligation is computed by reference to a index comprised of foreign securities.

We would further note that our response is predicated on the understanding that the return on the obligation does, in fact, represent "interest" on the obligation.

Although we are unable to provide any more specific criteria in terms of a general interpretation, the Agency would be prepared to consider any proposed transaction in the context of an advance income tax ruling.

We trust that this is the information which you require.

Yours truly,

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