7 February 2014 Internal T.I. 2013-0506151I7 - Section 216 returns and interest

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: Where there has been a failure to withhold under Part XIII followed by a 216 election to file under Part I, at what point does interest stop accruing on the Part XIII assessment?

Position: Interest on section 215 amounts will accrue until the section 216 elective filings have been made. After that point, interest will continue to accrue on any amount of Part XIII interest in arrears.

Reasons: On filing a Part I return under section 216, the Part XIII liability is replaced with a Part I liability. Following the Tax Court of Canada decision in Pechet, the process is contemporaneous so that the interest on the subsection 215 amounts would not continue to accrue beyond the point where the ultimate tax debt was settled. A 216 return effectively settles the Part XIII tax by replacing it with a Part I liability. Interest arrears on the original Part XIII tax remain owing until the 216 filing, and interest will continue to accrue on those arrears after the 216 filing.

February 7, 2014

Non-resident Withholding Division HEADQUARTERS
International Tax Services Office Income Tax Rulings
Directorate
Andrew Deak
Attention: Christopher Park
2013-050615

Section 216 returns and interest

We are writing in response to your letter dated September 26, 2013, in which you requested our views on the calculation of interest on a Part XIII assessment under the Income Tax Act (the "Act") after an election has been made under section 216 to file under Part I of the Act.

Your letter provided an example where an agent of a non-resident was assessed for failing to withhold and remit Part XIII tax on amounts paid to the non-resident as required by section 215. After the initial Part XIII assessment, the non-resident and the agent submitted an undertaking under subsection 216(4) where the non-resident would file a Part I return within six months of the year-end and the agent would remit on the net amounts of rental income. The appropriate return was filed by the filing-due-date. The taxes owed under Part I were nil. The Part XIII tax was then reassessed to remove the initial amount that was not withheld and remitted. However, interest on the Part XIII assessment continued to accrue between the date the Part I return was filed and the date that the Part XIII tax was reassessed to nil.

You asked us to confirm how the interest on the initial Part XIII assessment is calculated following a section 216 elective filing. Specifically, you asked us at what point does interest stop accruing on the initial Part XIII assessment?

Our Comments

Subsection 212(1) requires that every non-resident person pay an income tax of 25% ("Part XIII tax") on certain amounts that a person resident in Canada pays, or credits, or is deemed by Part I to pay or credit, to the non-resident person on account of certain kinds of income such as interest, trust income, rent, timber royalties and pension benefits.

Under section 215, a payor or an agent shall withhold and remit Part XIII tax. Pursuant to subsection 215(6), where a person fails to deduct or withhold Part XIII tax as required by subsection 215, that person is liable to pay the whole of the amount that should have been deducted or withheld.

Further, under subsection 227(8.3), a person who fails to deduct or withhold any amount as required by section 215 shall pay the Receiver General interest on the amount at the prescribed rate, computed from the day on which the amount was required to be deducted or withheld to the day of payment of the amount to the Receiver General.

Section 216 allows two possible ways for a non-resident person to file a return of income under Part I. Pursuant to subsection 216(1), the non-resident person may a file return for that year under Part I within two years after that year. Under subsection 216(4), where a non-resident undertakes in prescribed form to file within six months after the end of a taxation year a return of income under Part I, the Canadian agent can elect to withhold and remit to the Receiver General Part XIII tax calculated based on net amounts during the year. (footnote 1) While section 216 provides the option to file under Part I, it does not contain any provisions that relieve a person from the initial obligation to withhold and remit under section 215, whether on gross amounts under subsection 215(3) or on net amounts under subsection 216(4).

Sections 215 and 216 have been interpreted by the Tax Court of Canada and Federal Court of Appeal in Pechet v. HMQ. (footnote 2) The question before the Tax Court was whether the Appellant was liable to pay interest on amounts assessed under Part XIII in respect of taxation years where the ultimate tax liability of the Appellant was nil after filing under Part I. The wider issue addressed by the Tax Court concerned whether the arrears interest remained exigible after the Appellant filed elective returns under Part I, which reduced the amount of Part XIII tax payable by the Appellant to nil. The Tax Court found that a subsection 216(1) filing did not eliminate the application of Part XIII as it relates to the non-resident, and thus, the interest on the Part XIII tax remained exigible. The Federal Court of Appeal affirmed the Tax Court decision.

At paragraph 15, the Tax Court stated that, given the wording of 216(1), interest on a Part XIII assessment would "accrue at the very least up to the filing date". Further, at paragraph 22 the Tax Court judge notes,

"it is more practical and reasonable to view the whole process as contemporaneous so that the interest on the subsection 215(1) amounts would not continue to accrue beyond the point where the ultimate tax debt was settled. Obviously this would not eliminate the interest arrears owing to this point nor would it stop interest from accruing on those arrears." (footnote 3)

Thus, with respect to the scenario provided to us, it is our view that interest on section 215 amounts would continue to accrue until a subsection 216(4) filing of a Part I return has been made. As well, interest would continue to accrue on the interest arrears that accrued prior to the subsection 216(4) filing date. Once a subsection 216(4) filing is made, the non-resident person becomes liable to pay tax under Part I in lieu of – that is, in substitution for – paying the Part XIII amount. While a section 216 election does not retroactively extinguish the original liability to pay under Part XIII (due to the impact of the words "On so filing…"), filing under Part I may change the nature of the ultimate liability. For purposes of calculating Part XIII interest, the day upon which the subsection 216(4) filing was made is effectively the "the day of payment of the amount to the Receiver General" as per subsection 227(8.3). Such an interpretation is coherent with the purpose of section 215, as it recognizes the obligation to withhold and remit is not extinguished retroactively and thus the accrued interest on the Part XIII tax remains payable. (footnote 4) In addition, if the non-resident fails to file or pay on time, the agent would also be liable for the Part XIII tax on the gross amount, less the amounts already remitted, as per paragraph 216(4)(b).

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See Stellwaag v. The Queen, 2013 TCC 111, para 23.
2 2008 TCC 208 and 2009 FCA 341, respectively.
3 This interpretation is echoed in paragraph 24 of the Federal Court of Appeal judgment.
4 See para 22 of the TCC decision and para 26 of the FCA decision.