5 June 2001 External T.I. 2001-0085555 - Paragraph 3(d) of Article XI

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 paragraph 3(d) of Article XI of the Canada-U.S. Income Tax Convention applies where the debt obligation has been assigned to a third party resident in the U.S.?

Position:

Yes.

Reasons: One of the reasons for the amendment to paragraph 3(d) of Article XI of the Convention in the Third Protocol was to allow for factoring of accounts receivable.

XXXXXXXXXX 	2001-008555
		Jim Wilson
June 5, 2001

Dear XXXXXXXXXX:

Re: Paragraph 3(d) of Article XI of the Canada-U.S. Income Tax Convention (the "Convention")

This is in reply to your letter of May 18, 2001, requesting our views regarding the above-mentioned provision of the Convention. You have described a situation where a company resident in Canada ("Canco") entered into a purchase agreement to purchase machinery from a company resident in the U.S. ("USCO 1"). Canco received financing from USCO 1 in the form of an interest bearing promissory note. USCO 1 then assigned, among other rights, the promissory note to a related company resident in the U.S. ("USCO 2"). Canco is not related to either of USCO 1 or USCO 2. In interpreting paragraph 3(d) of Article XI of the Convention, you have some concern as to whether that provision requires that the seller (USCO 1) and the lender (USCO 2) not only be resident of the U.S. but also "be one of the same".

Our Comments

The situation outlined in your letter appears to relate to an actual transaction. We note that written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.

Paragraph 3(d) of Article XI of the Convention, as it read prior to the Third Protocol, was worded as follows:

"the interest is beneficially owned by a seller who is a resident of the other Contracting State and is paid by a purchaser in connection with the sale on credit of any equipment, merchandise or services, except where the sale is made between persons dealing with each other not at arm's length;" (underlining for emphasis)

Paragraph 3(d) of Article XI of the Convention was amended by the Third Protocol and currently reads as follows:

"the interest is beneficially owned by a resident of the other Contracting State and is paid with respect to indebtedness arising as a consequence of the sale on credit by a resident of that other State of any equipment, merchandise or services except where the sale or indebtedness was between related persons;" (underlining for emphasis)

The Technical Explanation to the Third Protocol, as it pertains to paragraph 3(d) of Article XI of the Convention, reads, in part, as follows:

"...... The exemption provided by that paragraph in the Convention is broadened under the Protocol to apply to interest that is beneficially owned either by the seller in the underlying transaction, as under the present Convention, or by any beneficial owner of interest paid with respect to an indebtedness arising as a result of the sale on credit of equipment, merchandise or services. ......" (underlining for emphasis)

In summary, paragraph 3(d) of Article XI of the Convention was amended by the Third Protocol to address situations, among others, where a debt obligation arising from the sale on credit of equipment, merchandise and services has been assigned (i.e., change in beneficial ownership) to a third party.

The above comments represent our general views with respect to the above-noted subject matter. These comments do not constitute an advance income tax ruling and, therefore, are not binding on the Canada Customs and Revenue Agency, as described in paragraph 22 of Information Circular 70-6R4. Furthermore, in your letter you indicate that there was also an assignment of the purchase agreement, the security interest and all other documentation and rights. We do not have enough information from your description of the facts to determine who in fact is the seller and whether in fact a sale on credit has been made. However, it appears from your letter that your only concern is with whether paragraph 3(d) of Article XI of the Convention can apply where there has been an assignment of a debt obligation to a third party. However, if you have other concerns relating to your specific fact situation, you may wish to consider requesting an advance income tax ruling and provide us with all the relevant documentation.

We trust that the above comments will be of some assistance to you.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -