23 February 1993 External T.I. 9306085 F - HA4093-C4 Interpretation of Article 11 Paragraph 3(b)(iii)

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.

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RE: CANADA-CHINA TAX AGREEMENT

ARTICLE 11 - INTEREST

This is further to your letter of February 23, 1993 requesting an interpretation of the application of subparagraph 3(b)(iii) of Article 11 of the Canada-China Tax Agreement (hereinafter "convention") in the following situation.

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In your opinion subparagraph 3(b)(iii) of Article 11 of the convention, exempts any interest paid by XXXXXXXXXX to its XXXXXXXXXX from withholding tax, as the loan was directly financed or guaranteed by XXXXXXXXXX as described in the subparagraph 3(b)(iii) of the convention.

Our Comments

In our view any interest paid by XXXXXXXXXX to its XXXXXXXXXX wouldnotbe exempt from withholding tax under the convention.

A review of the background notes in the original draft with respect to paragraph 3 of Article XI of the Convention indicate it was intended to exempt interest arising in Canada and paid to a resident of China in situations where the loan is similar to the type of loan that would be directly or indirectly financed or guaranteed by the Canadian Export Development Corporation ("EDC") or an equivalent institution in the other jurisdiction.  A review of the EDC mandate indicates that the "EDC" does not fund or guarantee "loans" to non-residents the funds of which are used to invest in the non-resident country.

With respect to the facts outlined in your letter, it appears the loan goes well beyond the types of financing arrangements that the "EDC" would be involved in.   The situation described appears to be more akin to an investment by XXXXXXXXXX in Canada rather than a guarantee or financing transaction to assist in the export of products between the two countries.

Yours truly

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch