10 July 1989 External T.I. 56775 F - Interest Payments by Canadian Borrower to U.S. Partnership

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.

July 10, 1989

Dear Sirs:

This is in reply to your memorandum of October 14, 1988 concerning the application of the Canada - U.S. Income Tax Convention (the Convention) in the following hypothetical fact situation:

1.      A U.S. partnership lends money to a Canadian borrower.  All partners are U.S. residents.  70% of the U.S. partners are taxable in the United States, while 30% are exempt U.S. pension funds.

2.      Interest is paid by the Canadian borrower to the U.S. partnership.  Part XIII of the Income Tax Act requires the Canadian borrower to withhold 25% of the amount paid to the non-resident.

It is your view that Article XI(2) of the Convention provides that the tax is reduced to 15% where the beneficial owner of the interest is a U.S. resident.  In addition, Article XXI(2) of the Convention provides that interest derived by a United States exempt entity will be exempt from Canadian tax.

It is our view that for purposes of the Convention a U.S. partnership should be treated as a conduit since a partnership is not taxed as a separate entity in either country.  Accordingly, in your example,

(1)      the 70% portion of the interest payments, made by the Canadian borrower to the U.S. partnership, which is attributable to the taxable U.S. partners (other than those set out in 2 below), is subject to tax under Part XIII of the Income Tax Act (the "Act") at the rate of 15 percent pursuant to paragraph 212(1)(b) and paragraph 2 of Article XI of the Convention.

(2)     the 30% portion of the interest payments, made by the Canadian borrower to the U.S. partnership, which is attributable to the non-taxable U.S. partners (entities described in paragraph 2(a) and (b) of Article XXI of the Convention), would be exempt from tax pursuant to paragraph 2 of Article XXI of the Convention.

In order to obtain exemption from withholding where some partners are exempt pursuant to Article XXI of the Convention, it is necessary to comply with paragraph 76 of Information Circular 77-16R3.  Persons making payments to a partnership that includes non-exempt U.S. partners who are the beneficial owners of the interest are also advised to contact the Department.  Paragraphs 76(f) and (g) of Information Circular 77-16R3 outline the procedures to be followed by the person paying amounts exempt from tax under paragraphs 1 and 2 of Article XXI of the Convention before making such interest payments.  You may wish to discuss this matter with Mr. John Oatway at (613) 954-1311 as to the administrative procedures to be followed so that the payor will not be liable for penalty and interest in cases where there are large numbers of partners involved.

We trust these comments are adequate for your purposes.

Yours truly,

D. Dalphyfor DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch