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.
RE: Withholding Tax on Subsidiary Deposits with Foreign Branches
This is in reply to your memorandum of March 10, 1987 concerning withholding tax under Article XI of the Canada-United Kingdom Tax Convention (Convention).
In view of the fact that this long outstanding issue has not been finalized because of delays in arranging a meeting between the representatives of the XXX Audit Applications Division and the Department of Finance, we are forwarding our technical position on this matter. It is our view that our technical response will not change as a result of the proposed meeting, however, it is possible that some administrative arrangements could be made as a result of such a meeting.
It is our understanding that you are delaying your proposed assessments until the above meeting has been held as a result of an agreement between Mr. Ken Warren, Director of Audit Applications Division and representatives of the XXX. Our response to your memorandum will be reviewed after the above meeting has been held and it should be noted that this response is not intended to override any arrangement made at the proposed meeting.
Your memorandum states that XXX.
We concur with your views that when the XXX subsidiary that a resident of Canada is making a payment of interest which would be subject to withholding tax in Canada unless it falls within the exceptions set out in paragraph 212(1)(b) of the Canadian Income Tax Act (the "Act") or is exempted by a tax convention or agreement. Since the payment of interest is being made by a Canadian resident to a XXX resident it would normally be subject to a 25% withholding tax.
The exceptions in paragraph 212(1)(b) are not applicable in your situation because the parties ore not dealing at arm's length. Paragraph 7 of Article XI of the Convention indicates that where the person paying the interest has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred and the interest is borne by that permanent establishment then such interest is deemed to arise in the Contracting State where the permanent establishment is situated. Therefore, where an interest-bearing loan is entered into
(1) for the requirements of the permanent establishment, and (2) the interest is borne by that permanent establishment
paragraph 7 deems the interest to be sourced in the State where the permanent establishment is located and not where the payor is located. For purposes of this paragraph the words "borne by" means that the interest has been allowed as a deduction in computing the taxable income of the permanent establishment.
The Department has concluded that the above deeming provision is only to determine the source of the income for the application of the Convention. Paragraphs 1 and 2 of Article XI of the Convention cannot apply to the present situation since the interest which arises in the United Kingdom is not paid to a resident of the other Contracting State (Canada). The Convention does not contain any other provisions that could deal with such income. Therefore, Canada is not precluded from imposing withholding tax at source.
It is our view that the fact that the interest is deemed by the Convention to arise in the United Kingdom has no impact as such on the application of paragraph 212(1)(b) of the Act. The requirements for the application of the above mentioned paragraph are that the payment of interest is made by a person resident in Canada to a non-resident person and that such interest does not fall within the exception set out in that paragraph. There are no requirements for the interest to arise in Canada to be subject to Part XIII withholding tax.
The purpose of the Convention is to avoid double taxation for residents of the Contracting State. Since the XXX.
We trust these comments are suitable for your purposes.
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