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:
Whether interest paid to a non-resident under the terms of a loan agreement that contains a provision for adjustments, from time to time over the term of a loan, to the stated interest rate (the "cap rate") that are based on the EBITDA of the borrower falls within the ambit of the broad wording in the postamble of paragraph 212(1)(b) of the Act?
Position TAKEN: Yes. Question of fact.
Reasons FOR POSITION TAKEN:
The wording of the postamble to paragraph 212(1)(b) would technically include such interest as being "...computed by reference to ... revenue, profit, cash flow...or any similar criterion...".
XXXXXXXXXX 2003-001708
P. Diguer, CGA
June 3, 2003
Dear XXXXXXXXXX:
Re: Postamble to paragraph 212(1)(b) of the Income Tax Act (the "Act")
This is in reply to your letter dated May 1, 2003, wherein you requested our views on the application of the postamble of paragraph 212(1)(b) of the Act to interest payments that may be reduced from an agreed "cap" interest rate based on earnings before interest, taxes, depreciation and amortization ("EBITDA").
The situation that is described in your letter appears to involve a series of actual completed transactions involving specific taxpayers. Written confirmation of the tax consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant tax services office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you.
Pursuant to the postamble following subparagraph 212(1)(b)(xii) of the Act, the withholding tax exemption in, for example subparagraph 212(1)(b)(vii) of the Act, is not applicable if interest "...is computed by reference to... revenue, profit, cash flow... or any similar criterion...". The determination of whether a particular payment method is considered as a payment of interest is a question of fact and can only be made after a review of the specific facts and supporting documentation of the particular loan.
Nevertheless, in our view, a loan agreement that contains a provision for adjustments, from time to time over the term of a loan, to the stated interest rate (the "cap rate") that are based on the EBITDA of the borrower falls within the ambit of the broad wording in the postamble of paragraph 212(1)(b) of the Act.
However, there may be situations where, in the context of an audit or an advance income tax ruling request, the provisions of a particular loan agreement and the circumstances of that borrower are such that paragraph 212(1)(b) of the Act may not be applied.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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