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.
Principal Issues: Whether Part XIII tax is payable on a payment made by a Canadian partnership on behalf of a non-arm's length foreign corporation in respect of the foreign corporation's Part XIII tax liability.
Position: The potential application of the relevant benefit provisions of the Act should be applied given the facts of each case.
Reasons: The relevant benefit provisions of the Act do not apply given the facts of this case. XXXXXXXXXX.
November 20, 2012
XXXXXXXXXX TAX SERVICES OFFICE HEADQUARTERS
Income Tax Rulings Directorate
Subject: Part XIII Tax Taxable Benefit
This is in response to your written enquiry concerning whether a taxable benefit is conferred on XXXXXXXXXX ("Forco") if XXXXXXXXXX ("the Partnership") pays a withholding tax liability on its behalf. You have indicated that a previous voluntary disclosure was accepted by the CRA on the basis that Forco's Part XIII tax liability by virtue of paragraphs 15(2)(b) and 214(3)(b) of the Income Tax Act (the "Act") was not required to be remitted since it would be offset by the impending refund under subsection 227(6.1) of the Act. However, due to the impact of the foreign exchange rates a difference arose and the refund was approximately $XXXXXXXXXX lower than originally anticipated. This has resulted in an outstanding withholding tax liability. Your position is that additional Part XIII withholding tax should be assessed if XXXXXXXXXX pays the outstanding withholding tax liability on behalf of Forco. Your position is based, in part, on comments from the Canada Revenue Agency's (the "CRA's") external interpretation number E9203335.
By virtue of paragraph 214(3)(a) of the Act where a taxpayer is not a resident of Canada, certain amounts, including a taxable benefit described in section 15 and subsection 56(2) of the Act, that would have been included in the taxpayer's income if Part I of the Act applied, are treated as deemed dividends and subject to Part XIII tax.
Document E9203335 refers to a taxable benefit that arises between a Canadian corporation and a non-resident shareholder under subsection 15(1) of the Act. Based on the facts submitted, there does not appear to be a benefit conferred directly on a shareholder by a corporation. Accordingly, subsection 15(1) would not apply. Therefore, we would need to consider subsection 56(2).
Subsection 56(2) of the Act will apply in cases where the taxpayer seeks to avoid the direct receipt of what in his/her hands would be income, by arranging to transfer that amount to some other person he/she wishes to benefit, or for his/her own benefit. Based on the facts provided, we considered the application of subsection 56(2) of the Act in respect of Forco, the Partnership's members, and XXXXXXXXXX (USco). On the basis that USCo has, in fact, directed that XXXXXXXXXX transfer property to Forco for the benefit of USco and such amount, if paid directly to USCo, would have been included in USco's income under subsection 15(1) of the Act as a shareholder benefit, subsection 56(2) of the Act may apply. The resulting deemed dividend to USco would be subject to Part XIII tax by virtue of paragraph 214(3)(a) and subsection 212(1) of the Act.
Given the specific anti-avoidance nature of the benefit provisions, their potential application ought to consider the conferral of a benefit based on a comprehensive analysis of the facts of this case. We submit that this particular fact situation XXXXXXXXXX. Consequently, we would recommend that additional Part XIII tax not be imposed on the outstanding withholding tax liability in question.
We trust these comments will be of assistance to you.
Lita Krantz, CA
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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