19 October 1992 Income Tax Severed Letter 9210095 - Loans to Non-residents

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.

921009
T.B. Kuss
24(1) (613) 957-2117

Attention: 19(1)

October 19, 1992

Dear Sirs:

Re: Subsection 15(2) and Paragraph 214(3)(a)

This is in reply to your letter dated March 30, 1992 in which you requested a technical interpretation regarding the application of subsection 15(2) and paragraph 214(3)(a) to the following hypothetical situation.

• • A corporation resident in Canada ("Canco") is wholly owned by a non-resident corporation ("USco");
• • Canco issues a note to USco payable on demand with interest also payable on demand;
• • USco then issues a note payable to Canco in an equivalent amount with the same terms and conditions;
• • Although the notes are equivalent in all respects, they are not directly tied together in any manner. As such, payment of principal and/or interest can be made on one

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of the notes independent of any payment being made on the
other;

• • No funds or other assets of any kind are exchanged by the companies for the notes, ie. Canco does not sell or transfer anything to or loan cash to USco in exchange for a note receivable from USco, except for the offsetting note payable and vice versa. Effectively the notes offset each other, however, since payment can be made on one independent of the other, they would be disclosed separately on the financial statements of Canco.
• • The notes do not relate to any transactions included in the "exceptions" outlined in subsection 15(2), and no payments would be made on the notes for at least three years.

Analysis and Discussion It is not clear why anyone would structure and carry out transactions such as those described above and in an actual fact situation additional details may prove helpful in determining how the Department should assess the transactions.

From a technical point of view, however, the interaction of subsection 15(2) and paragraph 214(3)(a) would result in the amount of the loan being deemed to have been paid to USco as a dividend from a corporation resident in Canada and would be subject to withholding tax pursuant to subsection 212(2). Reference should be made to Interpretation Bulletin number IT- 119R3 for the Department's administrative practice regarding when the withholding tax must be paid by in order not to attract penalty.

Pursuant to paragraph 2(a) of Article X of the Canada-U.S. Income Tax Convention the rate of withholding tax in the above circumstances shall not exceed 10% of the gross amount of the dividend.

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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