9 November 1989 Ruling 73933 F - Non-resident Withholding Tax on Payments of Guarantee Fees

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.

Subject:  Payments of Guarantee Fees to Non-Residents Whether Exempt from Part XIII Tax Pursuant to subparagraph 212(1)(b)(vii)

We are writing in response to your memorandum of May 8, 1989, regarding the above subject.

Facts

The facts as we understand them are as follows:

1.     A Canadian Corporation (CANCO) has made a loan from a syndicate of Canadian chartered banks and trust companies.

2.     The repayment terms of the loan are such that if the lenders were non-residents of Canada and arm's length with the borrower the conditions of subparagraph 212(1)(b)(vii) would exempt interest payments made on the loan from withholding tax under Part XIII of the Act.

3.     A U.S. affiliate (U.S. Sister) of CANCO has provided a guarantee to the syndicate of lenders for which it receives a guarantee fee from CANCO.

4.     CANCO and U.S. Sister have the same U.S. parent corporation.

5.     CANCO has made payments to U.S. Sister in respect of the guarantee and has not deducted tax under Part XIII. The reason given for not deducting tax is that the loan is exempt by virtue of subparagraph 212(1)(b)(vii).

6.     Your opinion is that subsection 214(15) deems the guarantee fee to be interest and that the payments are not exempt because they are made to a non-arm's length non-resident.

You have asked for the following:

(a)       Our interpretation of subparagraph 212(1)(b)(vii) as it applies to the above facts.

(b)       Whether the guarantee fees arising from or in connection with the loan obligation acquire the same characteristics as interest payments on the loan obligation.

(c)       Whether the conclusion would be different if the guarantor were an arm's length non-resident assuming all other facts are the same as those outlined above.

Analysis

Paragraph 214(15)(a) deems the guarantee fee to be a payment of interest on the obligation for the purposes of Part XIII. It does not deem the interest to be paid to the holder of the obligation.  As deeming provisions must be strictly construed, we would look to the party actually receiving the "interest" (i.e. the guarantee fee) to determine whether the arm's length test was met.

In the situation you have presented the payment would be subject to withholding tax. If the payment had been made to an arm's length party in similar circumstances, it would qualify for the exemption.

We trust these opinions will be useful for your purposes.

R.J. KauffmanChiefLeasing & Financing SectionFinancial Industries DivisionRulings Directorate