6 January 1988 Income Tax Severed Letter 5-5078 - Non-resident withholding tax—bank subsidiary deposits at the bank

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 November 12, 1987 wherein you requested our opinion concerning the withholding of tax in the following hypothetical situation.

A Canadian bank, with a worldwide branch and agency network has several wholly-owned U.S. subsidiaries. These subsidiaries would like to place funds on deposit with non-Canadian branches of the Canadian bank. Such deposits, for these purposes, refer to temporary deposits by a subsidiary of its surplus funds.

You are of the view that no Canadian withholding tax will be levied on the interest paid to a U.S. subsidiary of the bank in respect of funds on deposit with a non-Canadian branch of that bank by virtue of the Canada-U.S. Income Tax Convention (Convention).

Subsection 212(1)(b) of the Income Tax Act (the "Act") requires every non-resident of Canada to pay an income tax of 25% of every amount that a resident of Canada pays or credits to him. We are in agreement with your views that the bank and its wholly-owned subsidiaries do not deal with each other at arms length in accordance with paragraph 251(1)(a) of the Act and would not be exempt from the withholding tax by virtue of subparagraphs 212(1)(b)(iii) or (ix).

Paragraph 2 of Article XI provides that interest arising in Canada and paid to a resident of the United States may be taxed in Canada, however the rate so charged may not exceed 15%. In your example, the Canadian Bank should withhold 15% on all interest payments made by its non-Canadian branch to the bank's wholly-owned U.S. subsidiary.

However, paragraph 6 or Article XI states that "... the person paying the interest, whether he is a resident of a Contracting State or not, has in a State other than that of which he is a resident a permanent establishment ... in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment ..., then such interest shall be deemed to arise in the State in which the permanent establishment ... is situated and not in the State of which the payer is resident". Accordingly, if the conditions of paragraph 6 are met in your situation, the interest will be deemed to arise in the country where the non-resident branch is located and not in Canada.

Since Paragraphs 1 and 2 of Article XI of the Convention do not deal with interest arising in a third country and paid to a resident of the United States, such an item of income will fall within Paragraph 1 of Article XXII of the Convention. Paragraph I provides that items of income not dealt elsewhere in the Convention shall be taxable only in the state of residence unless it arises in the other Contract State. Therefore, provided Paragraph 6 of Article XI of the Convention would be applicable in a particular situation, then Article XIII of the Convention will exempt the payments made by the non-resident branches of the Canadian bank to its wholly-owned subsidiaries in the U.S. from withholding tax in Canada.

It should be noted that such an exemption is applicable to this particular Convention and its application to other income tax convention or agreements may not produce the same result.

We trust this is satisfactory for your purposes.