16 January 1984 Income Tax Severed Letter A-9430

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.

This is in reply to your letter of February 3, 1984 concerning the

provisions of Article XI of the Canada-U.S. Tax Convention (the "Treaty").

In the situation you describe, a corporation (A Co.), which is a resident of Canada for the purposes of the Treaty, carried on business in the U.K. through a permanent establishment therein. A Co. also owns all of the outstanding shares of the capital stock of B Co., a corporation which is a resident of the U.K. for the purposes of the Treaty. If A Co. borrows funds from B Co., which funds are used to finance the business carried on by A Co. in the U.K., and provided that the borrowing is effected in an arm's length manner and at a fair market value rate of interest, you are of the view that, pursuant to the provisions of paragraphs 2 and 7 of Article XI of the Treaty, the interest which is paid or credited by A Co. to B Co. under such loan would be exempt from tax under Part XIII of the Income Tax Act.

We agree that, provided the interest on the borrowed funds described above is "borne by" the permanent establishment in the U.K. of A Co., such interest would be exempt from Part CIII tax, which would otherwise be exigible in these circumstances. In our view, the exemption from tax in this situation is contained in paragraph 1 of Article VII of the Treaty rather than Article XI, since the provisions of Article XI do not exempt such interest from tax in Canada but merely permit interest arising in one of the Contracting States and paid to a resident of the other Contracting State to be taxed in the Contracting State in which it arises (see paragraph 2 of the Article). By virtue of paragraph 7 of Article XI, the provisions of paragraphs 1 and 2 of the Article are not applicable to your situation. Thus, by virtue of Article VII (and see paragraph 7 thereof in this regard) the interest in your situation would be protected from tax in Canada. We note that, as discussed with you, interest which is"borne by" a permanent establishment (for the purposes of paragraph 7 of Article XI) refers to interest which is properly deductible in computing the profits attributable to the permanent establishment and subject to tax in the State in which the permanent establishment is situated in accordance with Article VII of the Treaty.

We trust these comments will be of assistance.