6 February 1997 External T.I. 9610755 - Exemption for interest payable to non-resident - INSTALMENT SALE

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.

Principal Issues:

Whether interest exemption provided for by paragraph 3(d) of Article XI of the Canada-U.S. Income Tax Convention would continue to apply if repayment terms and interest rate modified.

Position:

Question of fact. Would depend if the changes were so fundamental as to result in the disposition of the old debt obligation and an acquisition of a new obligation.

Reasons:

Very limited facts provided. XXXXXXXXXX

	                          	961075
XXXXXXXXXX	                              David R. Senécal

Attention: XXXXXXXXXX

February 6, 1997

Dear Sirs:

Re: Article XI(3)(d) Canada-U.S. Income Tax Convention (the "Convention")

This is in reply to your letter of March 12, 1996, wherein you request our views concerning the interpretation of paragraph 3(d) of Article XI of the Convention in the following hypothetical fact situation:

• Canco acquires machinery and equipment from USco. The purchase agreement requires that instalment payments be made on the dates specified in the delivery and installation contract.
• Subsequent to the delivery and installation of the machinery and equipment, Canco obtains extended repayment terms. Interest is payable on the unpaid amounts in accordance with the new repayment terms.
• Canco and USco are not "related persons" within the meaning of that term in paragraph 3(d) of Article XI of the Convention.

The issue in question is whether the interest paid by Canco pursuant to the revised repayment terms constitutes interest paid "with respect to indebtedness arising as a consequence of the sale on credit..." within the meaning of those words in paragraph 3(d).

In our view, the question of whether the interest paid pursuant to the revised repayment terms would continue to qualify for exemption from Part XIII tax pursuant to paragraph 3(d) of Article XI of the Convention would depend on whether the alterations made to the debt obligation arising out of the sale agreement were so fundamental as to precipitate a disposition of that obligation and an acquisition of a new obligation. This is primarily a matter of law and, among other things, would depend on the intention of the parties. Therefore, any such determination must be made on a case by case basis and only after a review of all of the documentation and other information relevant to the particular case.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch