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 Sirs:
Further to the discussion held on October 14, we thought it appropriate to set out the Department's position concerning the exigibility to Part III tax of interest received by a non-resident, which interest constitutes one element of an amount paid by a Canadian guarantor.
In the McLaw's case [[1972] C.T.C. 165] (72 DTC 6149), the Supreme Court dealt with the state of the payment in the guarantor's hands and concluded (correctly, we believe) that the interest element did not meet the provisions of the Income Tax Act (the “Act”) for deductibility as an expense. Specifically, the interest element did not meet the requirements of what is now subparagraph 20(1)(c)(i) of the Income Tax Act. However, it is our view that in the recipient's hands, the component parts of the payments made by a guarantor retain their character so that if there would be a receipt of interest had the original borrower made the payment, there will be a receipt of interest if that payment is made by the guarantor. Since interest is being received by the non-resident recipient, the guarantor can, with respect to that interest, be said to be making a pact to the non-resident “as, on account or in lieu of payment of, or in satisfaction of interest,” thereby making the interest portion of the pact exigible to Part XIII tax unless such interest is exempt pursuant to one of the provisions set out in paragraph 212(1)(b) of the Act.
Support for this view can, we feel, be found in the Federal Court - Trial Division case involving the Queen v. Roynat [[1981] C.T.C. 93] (81 DTC 5072) and in the McLaw's case mentioned above where at page 6153, Hall J. makes the following comment:
“the interest paid by the appellant ..... ”
We trust that the above satisfactorily explains the Department's position.
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