16 November 2000 External T.I. 2000-0050975 - WITHHOLDING TAX ON SWAP PAYMENTS

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.Are "risk mitigation" payments pursuant to a swap agreement subject to Part XIII withholding tax because they have an interest component?

2.If they were found to contain an interest element, would they be considered to be obligations "similar" to bonds, debentures, mortgages or notes of a government of a province as per 212(1)(b)(ii)(C)(II)?

Position:

1.Generally, no.

2.Yes

Reasons:

1.A risk mitigation payment is not dissimilar to the circumstances in which the counterparties enter into a second separate swap agreement.

2.Position previously adopted in E9506325 re: government obligations.

XXXXXXXXXX 							2000-005097
J. P. Dunn
Attention:  XXXXXXXXXX 

November 16, 2000

Dear Sirs:

Re: Withholding Tax on Certain Swap Payments

We are writing in response to your correspondence of October 11, 2000 in which you had requested the views of Canada Customs and Revenue Agency with respect to certain payments made by government of a province of Canada pursuant to a cross currency\interest rate swap agreement to which that government is a party and, more particularly, whether those payments would be subject to withholding tax under Part XIII of the Income Tax Act (the "Act").

As we understand, the type of payment that is the subject of your enquiry is made by one of the counterparties to the other pursuant to risk mitigation provisions in the swap agreement. The payment is required when a financial calculation indicates that the market value of the position of either party exceeds a predetermined threshold. The final amount to be exchanged at the termination of the swap is adjusted by the amount of this payment and the periodic payments required to be made are similarly adjusted based on that revised amount. You have enquired whether the Agency would consider this type of risk mitigation payment and/or the revised periodic payments as being on account or in lieu of payment of, or in satisfaction of, interest for the purposes of Part XIII of the Act. Further, you have enquired whether, to the extent that the Agency responds to these questions in the affirmative, such payments would be exempt from withholding tax pursuant to subclause 212(1)(b)(ii)(C)(II) of the Act because the payments would be obligations similar to bonds, debentures, notes or mortgages of a government of a province as described in that provision.

As noted in your correspondence, the Agency has previously stated that a non-resident payee is not subject to Part XIII tax in respect of periodic swap payments on the basis that such payments would not be considered to contain an element of interest provided that the payments by the counterparties are made contemporaneously. This general position would be applicable to the revised periodic payments described above. Also, we would not consider that the payment made pursuant to the risk mitigation provision in the swap agreement would be considered to be on account, in lieu of payment of, or in satisfaction of interest for the purpose of Part XIII of the Act.

If, however, following a review of all of the pertinent details surrounding the swap agreement, it was found that a payment pursuant to the swap agreement did comport an element of interest, we would, generally, consider that the obligation to make the payment was, for purposes of Part XIII of the Act, an obligation similar to a bond, debenture, note or mortgage of a government of a province.

We trust that this is the information which you require.

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