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.
Dear Sirs:
This is in reply to your letter of June 25, 1987 in which you requested our opinion regarding the application of paragraph 212(1)(d) to the following hypothetical situation.
U.S. Co., a non-resident of Canada, is planning to rent industrial equipment to a Canadian resident. The Canadian resident lessee will sublet the equipment for use by sub-lessees located in both Canada and the United States. All equipment sublet to United States sub-lessees will be located outside of Canada.
The rental payments paid by the Canadian resident lessee to U.S. Co. will be calculated by reference to the use of the equipment made by the sub-lessees. This arrangement is analogous to the kilometrical charge levied by most car rental companies. The Canadian resident lessee will make an up-front payment equal to U.S. Co.'s cost of manufacturing the equipment. The periodic rental payments will be in addition to the up-front payment.
We provide the following general comments.
It would be a question of fact whether the relationship between U.S. Co and the Canadian resident lessee would be considered that of lessor and lessee rather than vendor and purchaser respectively.
Provided the relationship was one of lessor and lessee we confirm that rental payments and the up-front payments made by the Canadian resident lessee in respect of equipment sublet to United States sub-lessees and physically located in the United States would normally be exempt from Canadian withholding tax pursuant to subparagraph 212(1)(d)(ix).
However in your hypothetical situation you do not state whether U.S. Co. and the Canadian resident lessee would be dealing with each other at arm's length. If they would not be dealing at arm's length there could be a question with respect to the nature and reasonability of the up front payment and the periodic "rental" payments. To the extent such payments were considered "unreasonable" in the circumstances some portion of them may be deemed by paragraph 214(3)(a) of the Act to be dividends paid by the Canadian resident lessee to U.S. Co. and therefore subject to Part XIII tax by virtue of subsection 212(2) of the Act. Reference should be made to Information Circular 87-2 dated February 27, 1987 published by Revenue Canada, Taxation.
We hope these comments are of assistance.
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
© His Majesty the King in Right of Canada, 1987
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 le Roi du Chef du Canada, 1987
Email this Content