9 October 2001 External T.I. 2001-0096655 - Interest Exemption From Part XIII

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 CCRA.

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

Principal Issues: 1) Will paragraph 212(1)(b) apply to the return on a debt obligation paid to a non-resident where the return is computed by reference to a stock index? 2) Will interest paid on a GIC with a five year maturity be exempt from Part XIII taxes under subparagraph 212(1)(b)(viii) of the Act?

Position: 1) No. 2) Question of Fact.

Reasons: 1) This type of return does not meet the postamble requirement in paragraph 212(1)(b). 2) This determination would require a review of the terms of the debt obligation. CCRA's general comments are provided in IT-361R3.

XXXXXXXXXX 2001-009665
M. P. Sarazin, CA
October 9, 2001

Dear XXXXXXXXXX:

Re: Paragraph 212(1)(b) and Debt Obligations

This is in reply to your facsimile of August 10, 2001, requesting our views regarding the application of paragraph 212(1)(b) of the Income Tax Act (the "Act"). You have asked us to comment in respect of the following two questions.

Question #1

Where interest on a debt obligation is computed by reference to the change in a stock index, would the postamble to paragraph 212(1)(b) apply to such a debt obligation issued by a person resident in Canada to a non-resident person to exclude the debt obligation from the exceptions described in subparagraphs 212(1)(b)(ii) to (vii) and (ix) of the Act?

Response

The Canada Customs and Revenue Agency (the "CCRA") would not generally consider interest that is computed by reference to a stock index as satisfying the exception conditions described in the postamble to paragraph 212(1)(b) of the Act. This conclusion is based on the fact that computation by reference to a stock index would not generally be "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 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.

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. This determination is a question of fact.

Question #2

Would paragraph 212(1)(b) apply to a Canadian 5 year guaranteed investment certificate held by a non-resident person where the guaranteed investment certificate may be extended (at any time during the first 5 year period) for an additional 5 year term on maturity?

Response

The determination of whether interest paid to a non-resident in respect of a particular guaranteed investment certificate would be subject to tax under Part XIII of the Act is a question of fact. This determination would require a review of the terms of the specific guaranteed investment certificate.

Subparagraph 212(1)(b)(vii) provides an exemption for certain medium and long term debt financing provided by non- residents. The CCRA's general views with respect to the application of subparagraph 212(1)(b)(vii) are found in Interpretation Bulletin IT-361R3 titled "Exemption from Part XIII Tax on Interest Payments to Non-Residents". Paragraph 1 of IT-361R3 discusses the various conditions that a debt obligation has to satisfy in order for the interest thereon to be exempted from taxes under Part XIII of the Act. Paragraphs 2 to 6 of IT-361R3 discuss the 5 year maturity requirement and the redemption and conversion of debt obligations. The terms of the specific debt obligation will determine whether the interest paid to the non-resident would or would not be subjected to tax under Part XIII of the Act.

The determination of whether an amendment of a term of a debt obligation would constitute a disposition of the debt obligation and a reacquisition of a new debt obligation is a question of fact. In this regard, we refer you to Interpretation Bulletin IT-448 titled "Dispositions - Changes in terms of securities" and the comments under the heading "Changes in Terms of Debt Obligations" in Income Tax Technical News No. 14. We would apply the positions expressed in these documents in determining whether an extension of the maturity date of a debt obligation for an additional five year period under the terms of the debt obligation would constitute a disposition of the debt obligation and a reacquisition of a new debt obligation. However, where the amendment (i.e., extension of the maturity date) is in accordance with the original terms of the debt obligation, which appears to be the case in the particular situation you have briefly described, the CCRA would generally not view the extension as a repayment of the loan and the reissue of a new loan and the provisions of subparagraph 212(1)(b)(vii) would continue to apply.

Although we are unable to provide any more specific criteria in terms of general interpretations, the CCRA would be prepared to consider any proposed transaction in the context of an advance income tax ruling. General information regarding applying for an advance income tax ruling can be found in Information Circular 70-6R4. Copies of Interpretation Bulletins, Information Circulars and Income Tax Technical News are available on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust these comments will be of assistance.

Yours truly,

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