28 September 1988 Income Tax Severed Letter 7-3130 - Part XIII tax and whether a benefit has been conferred on a non- resident

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.

This is in response to your memorandum of August 2, 1988. You have indicated that you are dealing with a situation where a Canadian resident corporation has paid a freight charge on behalf of its U.S. resident sister company where it was under no obligation to do so. Since a Canadian resident has conferred a benefit on a non-resident, paragraph 245(2)(b) of the Act deems this to be a payment to which Part XIII applies. You have requested Our comments as to whether Canadian withholding tax would be reduced pursuant to either the 1980 Canada-U.S. Income Tax Convention (the “1980 Convention”) or the 1942 Canada-U.S. Income Tax Convention (the “1942 Convention”).

In our opinion, based on the case of Indalex v. The Queen [[1986] 1 C.T.C. 219] (86 DTC 6039), subsection 245(2) of the Act, is an independent taxing provision. consequently, a deemed payment assessed pursuant to paragraph 245(2)(b) of the Act, is considered in effect as being assessed pursuant to a separate paragraph of subsection 212(1) of the Act. Because the paragraph 245(2)(b) benefit would not qualify in any of the specific categories of payments that are taxed under section 212 of the Act, it is our view that such a payment would fall within the “Other Income” article for the purposes of the 1980 Convention. Article III of the 1980 Convention does not prevent Canada from taxing such a benefit and does not provide any relief from the 251 withholding tax required by Part XIII of the Act.

Pursuant to the Entry into Force provisions of the 1980 Convention found in Article XXX(5), the greater benefits of the 1942 Convention would continue to apply to the U.S. resident company through to the end of its first taxation year beginning on or after January 1, 1985. Under Article XI of the 1942 Convention, Canadian taxation of deemed payments assessed pursuant to paragraph 245(2)(b) of the Act would have been limited to 15% withholding tax. Accordingly, since the transaction took place prior to May 9, 1985 the appropriate rate of Canadian Withholding tax would appear to be 15%.