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:
Re: Withholding Tax under Paragraph 212(1)(d) Your File Reference: 23384/56
This is in reply to your letter dated November 15, 1990 whereby you requested our opinion as to whether there will be withholding tax payable under paragraph 212(1)(d) of the Income Tax Act (the "Act") in respect of royalties paid or credited by the BD Partnership to Corporation X in the following hypothetical situation:
A C
X
B D partnership
1. Corporation B is a wholly-owned subsidiary of Corporation A.
2. Corporation D is a wholly-owned subsidiary of Corporation C. Corporations A and B both deal at arm's length with the Corporations C and D.
3. The shares of Corporation X are held equally by Corporation A and C.
4. Corporation B is resident in Canada. Corporation A, C, D and X are not resident in Canada.
5. A partnership is formed between corporation B and D (the "BD Partnership") to carry on an active business entirely outside Canada. In connection with this business, the BD Partnership pays royalties to Corporation X and Corporation X, in turn, pays royalties (in equal amounts) to Corporations A and C. The royalties payable by the BD Partnership in computing the income of the partnership from a business carried on in a country other then Canada.
In our opinion, assuming the royalties are not deductible by the BD Partnership in computing its income from a source in Canada, by virtue of paragraph 212(13.1)(a), the BD Partnership will not be considered to be a person resident in Canada for purposes of Part XIII of the Act. Accordingly, tax will not be exigible under paragraph 212(1)(d) of the Act in respect of the royalties paid by the BD Partnership to Corporation X.
We are unable to express an opinion as to whether subparagraph 212(1)(d)(x) could apply to the royalties as it is a question of fact as to whether the BD Partnership and Corporation X are dealing at arm's length. However, we can advise that in the hypothetical situation described above we would consider there to be a presumption that the BD Partnership and Corporation X are not dealing at arm's length.
The opinions expressed herein are not advance income tax rulings and, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, are not considered binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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