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: (1) Where subsection 80.4(2) applies to a non-resident person receiving a non-interest bearing loan from another non-resident person, whether the non-resident debtor is liable to tax under subsection 212(2) and whether the non-resident creditor has the obligation under subsection 215(1) to withhold and remit the tax. (2) If the non-resident creditor fails to withhold and remit the tax under subsection 215(1), whether there is a provision under the Act that would allow the Minister to assess one of the corporations resident in Canada for such tax.
Position: (1) The non-resident debtor is liable to tax under subsection 212(2) and the non-resident creditor is obligated under subsection 215(1) to withhold and remit the tax. (2) If certain conditions are satisfied, the Minister may be able to assess Canco under subsection 160(2) in respect of an amount payable by Canco under subsection 160(1).
Reasons: (1) The scheme of the Act and the application of all relevant provisions based on a textual, contextual, and purposive approach of statutory interpretation. (2) Subsection 160(1) can apply to cascading transfers of property.
August 16, 2017
XXXXXXXXXX, International Tax Auditor HEADQUARTERS
XXXXXXXXXX TSO Income Tax Rulings
Re: Part XIII Tax on Benefit to Non-resident
This letter is a reply to your email wherein you requested our comments as to whether the situation described below results in a tax liability under Part XIII of the Income Tax Act (the “Act”) and, if so, which entity has the obligation to withhold and remit the tax under subsection 215(1) of the Act. In addition, we considered whether there is any provision under the Act that the Minister could potentially rely upon to collect the tax if the non-resident person who is liable to withhold and remit under subsection 215(1) of the Act fails to do so.
Unless otherwise noted, all statutory references herein are references to the Act.
Our understanding of the relevant facts is as follows:
- A non-resident corporation (“Foreign Parent”) holds all issued and outstanding shares in a Canadian resident corporation (“Can Holdco”).
- Can Holdco holds all issued and outstanding shares in another Canadian resident corporation (“Canco”).
- Foreign Parent also directly or indirectly holds a 100 percent interest in a non-resident corporation (“Foreign Sub”). For greater certainty, Foreign Sub is not a foreign affiliate (as defined in subsection 95(1)) of Canco or Can Holdco, or of any other person resident in Canada that does not deal at arm’s length with any of the relevant entities.
- Canco holds an interest in Opco, which is a foreign affiliate of Canco and Can Holdco.
- Using the funds generated from its operations, Opco makes an equity investment in Finco, another foreign affiliate of Canco and Can Holdco.
- Using the equity contribution made by Opco, Finco makes a non-interest bearing loan to Foreign Sub.
- The loan is repaid within two years and therefore subsection 90(6) does not apply to the loan.
It is clear that there is an intended relationship between the provisions under subsections 80.4(2), 15(9), 15(1), paragraph 214(3)(a), subsection 212(2), and subsection 215(1) of the Act. In the situation described, there is no ambiguity that subsection 80.4(2) applies to deem Foreign Sub to have received a benefit in an amount computed based on the prescribed rate. Subsection 15(9) then provides a deeming rule that transforms the subsection 80.4(2) benefit into a shareholder benefit under subsection 15(1).
Generally for subsection 15(1) to apply, there has to be a direct shareholding relationship between the benefit recipient and the benefit conferrer. However, where the benefit arises from the application of subsection 80.4(2), by virtue of the deeming rule in subsection 15(9), whether an actual direct shareholding relationship exists between the benefit recipient and the benefit conferrer is irrelevant for the purposes of subsection 15(1). The benefit computed under subsection 80.4(2) is deemed by subsection 15(9) for the purposes of subsection 15(1) to be a benefit conferred on a shareholder. If subsection 15(1) could only apply where there was a direct shareholder relationship between the benefit recipient and the benefit conferrer, it would not only render the “connected” concept under subsection 80.4(2) meaningless, but also would imply that the only purpose of subsection 80.4(2) is to provide a formula for the calculation of a subsection 15(1) benefit. Such an interpretation could not be valid, given that subsection 80.4(2) is designed for a broad application.
Who is the non-resident person liable to tax under subsection 212(2) and who is liable to withhold and remit under subsection 215(1)?
As the “shareholder” in subsection 15(1), Foreign Sub would be the taxpayer who is deemed to have received the dividend under paragraph 214(3)(a), and it is therefore Foreign Sub who is liable for the withholding tax imposed under subsection 212(2).
In regard to the liability to withhold and remit under subsection 215(1), it is our view that the person who makes the loan on which the subsection 80.4(2) benefit arises (i.e. Finco) is the person who is required to withhold and remit the Part XIII tax.
Subsection 215(1) provides that a person is obligated to withhold and remit if the person “pays, credits or provides, or is deemed to have paid, credited or provided, an amount on which an income tax is payable under this Part”.
Under subsection 80.4(2), Foreign Sub is deemed to have received an amount of benefit that is attributable to a loan received from Finco. Through the applications of subsections 15(9), 15(1), paragraph 214(3)(a) and subsection 212(2), income tax is ultimately payable under Part XIII on that same amount. Subsection 215(1) does not speak of the nature of this “amount”; it only requires that income tax is payable on it. In our view, Finco provided the amount of benefit under subsection 80.4(2) and that same amount is taxed under Part XIII. Therefore, Finco would be the person that is obligated to withhold and remit under subsection 215(1).
Can the Minister apply any other provisions of the Act to collect the tax if Finco fails to withhold and remit under subsection 215(1)?
If Finco fails to deduct or withhold and remit the tax as required by subsection 215(1), Finco is liable to pay that tax on behalf of Foreign Sub pursuant to subsection 215(6). In this circumstance, the Minister may assess the Part XIII tax payable by both Foreign Sub and Finco in accordance with paragraph 227(10.1)(c).
Opco could potentially be jointly liable to the tax under subsection 160(1) if Finco pays a dividend to Opco in the taxation year in which Finco becomes liable to pay such tax or in a subsequent taxation year, to the extent of the amount of the dividend or the amount of such tax, whichever is the lesser. Similarly, if Opco receives a dividend from Finco and then pays a dividend to Canco in the taxation year in which Opco becomes liable to pay the tax under subsection 160(1) or a later year, then Opco would be considered the “transferor” of the property under subsection 160(1) and Canco, as the transferee of the property, would be jointly liable to the tax with Opco, to the extent of the amount of the dividend or the amount of the tax, whichever is the lesser.
Where Canco becomes jointly liable to pay the tax with Opco under subsection 160(1), pursuant to subsection 160(2), the Minister may assess Canco in respect of that amount payable.
Finally, the Minister could potentially apply subsection 227.1(1) to collect the tax from the directors of Finco, unless the exceptions under subsections 227.1(2) or 227.1(3) apply.
We trust our comments will be of assistance.
For your information 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 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.
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2017
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2017