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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principales Questions:
interest payments made by employees resident of Canada to certain retirement plans resident in the U.S.A. would be exempt from Canadian withholding tax under Part XIII of the Act by virtue of Article XXI, par. 2 of the Treaty
Position Adoptée:
no obligation to withhold if the payer is dealing with at arm's length
Raisons POUR POSITION ADOPTÉE:
Pursuant 212(1)(b)(iv) if a certificate of exemption that is in force has been issued pursuant to 212(14)
5-941445
XXXXXXXXXX Carole Pronovost
(613) 957-8953
Attention: XXXXXXXXXX
December 8, 1994
Dear Sirs:
Re: -Part XIII Tax on interest payment
-Article XXI, paragraph 2 of the Canada-U.S. Income Tax Convention(1980) ( the "Treaty).
This is in reply to your letter dated February 28, 1994 (received by fax in our office on June 3, 1994) wherein you asked us to confirm that the interest payments made by employees resident of Canada to certain retirement plans resident in the United States would be exempt from Canadian withholding tax under Part XIII of the Income Tax Act (the "Act"), by virtue of Article XXI, paragraph 2 of the Treaty.
Situation
You describe the following situation. Several U.S. multi-nationals have Canadian-based employees (transferred from the United States) participating in their U.S. Employees' Profit Sharing Retirement Income Plans (the "Plans"). The Plans are qualified retirement plans under section 401(a) of the United States Internal Revenue Code. In general, the Plans allow participants to take loans against plan 401(k) contributions. The Plans are tax exempt arrangements for US tax purposes.
Your question
You would like us to confirm that the employees' interest payments on the loans from the Plans are exempt from Canadian withholding tax under Part XIII of the Act pursuant to Article XXI, paragraph 2 of the Treaty.
Article XXI paragraph 2 of the Treaty provides generally, subject to paragraph 3, that a trust or other organization which is resident in a Contracting State, generally exempt from tax in that state, and which is constituted and operated exclusively to administer or provide pension, retirement or other employee benefits shall be exempt from tax in the other contracting state.
Assuming that the organization that administers the 401(k) plan is constituted and operated exclusively for the aforementioned purposes, that it continues to be exempt from tax with respect to loans to employees and that the interest income of the organization is not income from carrying on a trade or business or from a related person, it would qualify for the exemption provided for in paragraph 2 of Article XXI of the Treaty. However, the determination of whether or not a particular plan qualifies for the exemption must be made on a case by case basis having regard to the relevant facts and circumstances of the plan.
With respect to the obligation to withhold, we note that a person who pays or credits an amount taxable under Part XIII, such as interest, is generally required to withhold the amount of tax pursuant to subsection 215(1). Pursuant to subparagraph 212(1)(b)(iv) of the Act however, there is no requirement to withhold tax on interest on any bond, debenture or similar obligation paid to a non-resident with whom the payer is dealing with at arm's length, if a certificate of exemption that is in force has been issued pursuant to subsection 212(14) of the Act (see paragraph 80 of Information Circular 77-16R4 dated May 11, 1992). Concerning the possibility of obtaining such a certificate, we refer you to paragraphs 78 and 79 of Information Circular 77-16R4 which describe the procedure to follow to get the certificate of exemption. Please note that the protocol amending the Treaty between Canada and the United States announced on August 31, 1994, does not appear to affect the rules materially regarding the taxation of interest payments to non-resident pension plans.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, this is not an advance income tax ruling and is not binding on the Department. In addition, the above comments should in no way be construed as relating to any other tax issues in connection with participation in such plans.
We trust that these comments are suitable for your purposes.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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