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: Will paragraph 212(1)(d) of the Act apply to the payment by Canco to Forco as the result of their Mutual Termination Agreement?
Position: Yes
Reasons: The payment will be made in lieu of payment of rent for the right to use in Canada, a property.
March 10, 2015
XXXXXXXXXX TSO HEADQUARTERS
XXXXXXXXXX Income Tax Rulings
Directorate
Attention: XXXXXXXXXX L. Carruthers
A/Large File Case Manager (613) 670-9000
2015-057429
Payment in consideration for the termination of XXXXXXXXXX
We are writing in response to your email dated XXXXXXXXXX which was forwarded to us by the Large Business Audit Division of the International and Large Business Directorate (ILBD) of the Compliance Programs Branch (CPB). In your email, you asked whether Part XIII tax will apply to a payment to be made (the Early Termination Payment as described below) by XXXXXXXXXX ("Canco") to XXXXXXXXXX ("Forco") as the result of their Mutual Termination Agreement which terminated the XXXXXXXXXX of XXXXXXXXXX properties situated in Canada (the "Canadian XXXXXXXXXX Property"). We also acknowledge the further information you sent by email the last of which was received on XXXXXXXXXX.
Facts
Our conclusion is based on our understanding of the facts as outlined below:
1. Canco is a resident of Canada for purposes of the Income Tax Act (the "Act");
2. Neither Forco nor its sole owner is a resident of Canada for purposes of the Act;
3. Commencing in XXXXXXXXXX, Canco XXXXXXXXXX for the Canadian XXXXXXXXXX Property (the "XXXXXXXXXX");
4. Canco XXXXXXXXXX the Canadian XXXXXXXXXX Property to XXXXXXXXXX ("LP") (the "XXXXXXXXXX");
5. LP XXXXXXXXXX real property XXXXXXXXXX as contemplated under the XXXXXXXXXX;
6. Canco XXXXXXXXXX from LP the Canadian XXXXXXXXXX Property together with the real property XXXXXXXXXX referred to above (the "XXXXXXXXXX");
7. Pursuant to Sections XXXXXXXXXX of the XXXXXXXXXX Master Agreement between Canco and LP regarding the XXXXXXXXXX, Canco shall pay a "Termination Payment" (as defined in Section XXXXXXXXXX of the Mutual Agreement) if it decides to terminate the XXXXXXXXXX for XXXXXXXXXX under circumstances constituting an "Early Termination" (as defined in Sections XXXXXXXXXX of the Mutual Agreement);
8. The Termination Payment for XXXXXXXXXX, as computed pursuant to Section XXXXXXXXXX of the Master Agreement, would be calculated as:
XXXXXXXXXX
9. On XXXXXXXXXX, LP assigned, transferred and set over unto Forco all of its right, title, and interests in, and Forco assumed all of LP's obligations under, the XXXXXXXXXX and Master Agreement;
10. As a result of the XXXXXXXXXX:
a. Canco is liable for making direct payments to Forco for obligations under the XXXXXXXXXX,
b. Forco is liable for making direct payments to Canco for obligations under the XXXXXXXXXX, and
c. Canco is liable for making XXXXXXXXXX payments to the XXXXXXXXXX for obligations under the XXXXXXXXXX;
11. Pursuant to paragraph 212(1)(d) and subsection 215(1) of the Act, Canco withheld and remitted to the Canada Revenue Agency Part XIII withholding tax from the payments, as described in subparagraph 10(a) above, it made to Forco;
12. XXXXXXXXXX;
13. On XXXXXXXXXX, Canco, Forco and LP entered into the Mutual Termination Agreement which triggered:
a. an Early Termination (as that term is defined for the purposes of Section XXXXXXXXXX of the Master Agreement) for each of the XXXXXXXXXX, and
b. a Termination Payment with respect to each of the XXXXXXXXXX (in the aggregate, the "Early Termination Payment"); and
14. The amount of the Early Termination Payment, calculated in accordance with the terms of the Master Agreement, is anticipated to be $XXXXXXXXXX.
Conclusion
Based on our understanding of the relevant circumstances as described above, in our view, the Early Termination Payment will be made by Canco to Forco as consideration for the termination of the XXXXXXXXXX under which rent would have been payable for the use of the Canadian XXXXXXXXXX Property. As such, it is our further view that the Early Termination Payment will be an amount paid by a resident of Canada (Canco) to a non-resident of Canada (Forco) in lieu of payment of rent for the use of, or for the right to use in Canada, a property (Canadian XXXXXXXXXX Property) such that Part XIII withholding tax will apply pursuant to paragraph 212(1)(d) of the Act.
Our conclusion is, in our view, supported by the Federal Court of Appeal's decision in Transocean Offshore Limited v The Queen (2005 FCA 104). In that case, the Court dismissed the taxpayer's appeal from an assessment made under Part XIII of the Act where the tax had been assessed on a payment made as consideration for the anticipatory breach of an agreement under which rent would have been payable for the use in Canada of an offshore drilling rig.
For your information, a copy of this Memorandum is being sent to Leslie Bafia of the Legislative Application Section of the Large Business Audit Division of ILBD/CPB. Moreover, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to LPRA-PLAR ITR-DDI Access Team-Équipe d'Accès. In such cases, a copy will be sent to you for delivery to the taxpayer.
Lori M. Carruthers CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc. Leslie Bafia
Legislative Application Section
Large Business Audit Division
ILBD/CPB
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