14 June 1996 CTF Roundtable Q. 8, 9617060 - DOES 250(5) OF THE ACT NULLIFY 212(13.2) OF THE ACT?

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:

Does subsection 250(5) of the Act override subsection 212(13.2) of the Act?

Position: No.

Reasons:

Such an interpretation would be circular and clearly in contradiction with the spirit and object of subsection 212(13.2).

DRAFT

Canadian Tax Foundation
Corporate Management Tax Conference
June 14, 1996

QUESTION 8 Interaction of Subsections 250(5) & 212(13.2)

A U.S. corporation wishes to acquire an existing business in Canada and decides, for U.S. tax reasons, to establish a wholly-owned U.S. subsidiary ("Subco") to purchase the business. Subco finances the acquisition with money borrowed from related parties and from banks in the United States. The operations of Subco are carried on solely in Canada. All directors of Subco reside in Canada and all directors meetings are in Canada. Subco would be regarded as resident both in Canada and the United States under their respective domestic laws. By virtue of Subco's incorporation in the United States, paragraph 3 of Article IV of the Canada - U.S. Income Tax Convention ("Convention") would deem Subco to be a resident of the United States for purposes of the Convention. As the Convention would then generally deny Canada the right to tax non-Canadian source income earned by Subco, subsection 250(5) of the Income Tax Act (the "Act") would apply and deem Subco not to be resident in Canada for purposes of the Act.

A)Subsection 250(5) of the Act seems to conflict with subsection 212(13.2) of the Act which deems Subco to be a resident of Canada for purposes of Part XIII tax. Is subsection 212(13.2) of the Act effectively nullified by the interaction of paragraph 3 of Article IV of the Convention and subsection 250(5) of the Act?

B)If it is Revenue Canada's view that the interest paid by Subco is subject to Part XIII tax, can the interest be eligible for the 5 year arm's length exemption in subparagraph 212(1)(b)(vii) of the Act where one of the pre-requisites is that the payer be "a corporation resident in Canada"?

Department's Position

A)Subsection 212(13.2) of the Act is intended to apply to a non-resident, factual or deemed, so as to treat that non-resident, for purposes of Part XIII, as a person resident in Canada with respect to the payment or portion thereof that was deductible in computing that person's taxable income earned in Canada. The objective of this provision is to bring the transaction within the scope of the subsection 212(1) pre-amble which otherwise would only apply to those amounts "that a person resident in Canada pays or credits ...... to the non-resident person". It should be noted that the ultimate Part XIII tax is a tax on the non-resident recipient of the interest and not Subco.

Where subsection 250(5) of the Act applies to deem a corporation "to be not resident in Canada", that corporation will be considered a "non-resident person" as that term is used in paragraphs 212(13.2)(a) and (b) of the Act. Accordingly, interest payments made by Subco to a non-resident of Canada would be subject to Part XIII tax, subject to any exemptions that may otherwise be applicable. To interpret subsection 212(13.2) of the Act in the circular manner suggested above is clearly in contradiction with the spirit and object of the provision.

B)Where subsection 212(13.2) of the Act applies such that a non-resident payer of interest (eg. Subco) is deemed to be a person resident in Canada and that payer is a corporation, interest payable by the non-resident corporation will represent "interest payable by a corporation resident in Canada" for purposes of subparagraph 212(1)(b)(vii) of the Act. Accordingly, if all the other requirements of subparagraph 212(1)(b)(vii) of the Act are met, interest paid by Subco to the arm's length U.S. lender would be exempt from Part XIII tax.

Author: J. Wilson
File: 961705
Date: May 15, 1996