22 April 1982 Income Tax Severed Letter A-6466

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 Sir:

Your letter of February 24, 1982, addressed to the Montreal District Office has been transferred to us for reply. You are requesting a ruling on the following situation.

Canadian investors will be able to borrow money from Swiss investors on a long-term basis. The term of the loan will be for a period of 5 years and 1 day. The Canadian investors will then invest the money with corporations resident in Canada at a higher rate than the rate they pay the loan.

You want a ruling on the following two points:

• 1) Inasmuch as no capita1 will be paid for 5 years and 1 day, but the interest will be paid on an annual basis, are the Swiss investors subject to any Canadian or Quebec income tax?
• 2) Will the Canadian investors who are borrowing on the Swiss market and lending on the Canadian market be permitted to deduct the interest that they pay to the Swiss investors in computing their income?

Since your request has not been presented in the form required by the Department we cannot issue a ruling on the transaction. We refer you to paragraphs 15 and 16 of Information Circular 70-6R dated December 18, 1978 for details on the procedure for requesting an advance ruling.

You have not stated whether your clients were corporations, individuals or others which varies the tax treatment. Furthermore, you have not stated how the funds will be invested in Canada, which will also affect the tax treatment. However, we can offer you the following general comments.

Subject to specific exceptions, paragraph 212(1)(b) of the Canadian Income Tax Act (the Act) requires every non-resident person to pay an income tax of 25% (15% under the Canada-Switzerland tax agreement) on every amount that a person resident in Canada pays or credits to him on account of interest. Amongst all the exceptions described in paragraph 212(1)(b) of the Act, one is susceptible of application in your situation, if the Canadian borrowers are corporations.

Subparagraph 212(1)(b)(vii) provides that Part XIII tax is not payable by a non-resident person on interest received by him from a corporation resident in Canada provided certain conditions are met. These conditions are:

• 1) the nonresident must be dealing at arm's length with the corporation;
• 2) the interest must have been received in connection with an obligation where the evidence of indebtedness was issued by the corporation after June 25, 1975 end before 1983;
• 3) under the term of the obligation the corporation may not, under any circumstances, be obliged to pay more than 25% of try principal amount thereof within 5 years of the date of its issue except in the event of a failure or default under the said terms.

The temn "obligation" includes bonds, debentures, notes, mortgages, guaranteed investment certificates and other debt obligations having a fixed term to maturity of not less than 5 years.

Consequently, we are of the opinion that the Swiss investors would not be subject to Part XIII tax if the Canadian borrowers are corporations resident in Canada, and if the above conditions are satisfied we cannot offer comments on the tax implications of this situation under the Quebec Income Tax Act since we have no authority to do so. We recommend that you address your request to the Quebec Revenue Department accordingly. We are enclosing a copy of our Interpretation Bulletin IT-361 which may be of interest to you.

XXX

In reply to your second question, we are of the opinion that the Canadian borrowers will be permitted to deduct the interest that they pay to the Swiss investors in computing their income, to the extent that the funds are used to earn income and subject to the following comments.

Resolution 23 of the Notice of Ways and Means motion to amend the Income Tax Act, tabled in the House of Commons on November 12, 1981 by the Honourable Allan J. MacEachern, Minister of Finance, and proposed to be amended on December 18, 1981, recommends that the interest expenses (restricted interest) that would otherwise be deductible in a year on money borrowed by an individual or partnership to earn income from property be restricted to such income for the year. However, such restriction would be subject to a transitional period of two years, as explained in the Release from the Office of the Honourable Allan J. MacEachen, Deputy Prime Minister and Minister of Finance, dated December 18, 1981. An extract of this Release commenting this point is enclosed.

We trust these comments will be of assistance to you.