Income Tax Severed Letters - 2021-10-27

Principal Issues: Whether portion of periodic payment under a swap agreement made to non-arm's length non-resident is considered interest and therefore subject to withholding tax.

Position: Generally, no.

Reasons: The 1984 Position attempts to look to the economic substance of a financial instrument and bifurcate a payment between interest income and section 9 income. This position is difficult to support in light of jurisprudence, provisions of the Act, and many administrative views expressed by Rulings on the taxation of derivative financial instruments. Consistent with the Supreme Court of Canada’s comments in Shell Canada Ltd v the Queen, [1999] 3 S.C.R. 622 (SCC), in absence of sham or a provision to the contrary, the better view is that no portion of the swap payment from Canco to NRco can be considered interest, and therefore, withholding tax does not apply.

Principal Issues: 1. What is the current CRA work situation in connection with the conduct of international audits and requests for foreign based information? 2. How has the CRA been managing both the Advance Pricing Arrangement (APA) and Mutual Agreement Procedure (MAP) requests in the current environment and what is the plan going forward? 3. Has the Transfer Pricing Review Committee (TPRC) been meeting regularly during the COVID-19 pandemic and what is the plan going forward? 4. As there have been significant domestic and international travel restrictions imposed because of the COVID-19 pandemic, how has the CRA been managing APA and MAP matters with treaty partners? 5. How is the CRA addressing issues surrounding impending treaty-based limitation periods? Have extensions been discussed with treaty partners?

Position: 1. The CRA has resumed a full range of audit work and continues to adapt its practices to reflect the health and economic impacts of COVID-19. On June 23rd, 2020 the CRA launched its National Business Resumption Plan to detail the stages of the resumption of various program and corporate activities and operations that had not resumed during the CRA’s critical services phase under the Business Continuity Plan. Priority continues to be given to actions that are beneficial to the taxpayer or where taxpayers have indicated there is an urgency to advancing their audit. In prioritizing the resumption, focus is placed on higher dollar audits first, audits close to completion, and those with a strategic importance to the Government of Canada, provinces and territories, or our tax treaty partners. 2. APA and MAP requests are continuing to be received and being worked on. Time limits for mandatory arbitration have not changed as communications and negotiations with foreign tax administrations continue to occur through the same virtual means. 3. Yes, the TPRC has been meeting regularly throughout the COVID-19 pandemic. There have been no delays in scheduling the monthly meetings nor in the decision making process. 4. The CRA developed a webpage on Canada.ca to provide guidance on international income tax issues raised by the COVID-19 crisis. The administrative approach taken by the CRA in addressing these issues is intended to assist taxpayers during this time of crisis. It does not represent any interpretive position or intention to establish any broader policy by the CRA. 5. There is no flexibility to extend treaty based limitation periods and, wherever possible, we have been meeting those deadlines and reassessing in time. For domestic situations, in the early days of the COVID-19 pandemic, we processed only high risk reassessments. Reassessments that were close to becoming statute barred were generally in that category, particularly for material issues.