2 July 1996 External T.I. 9618315 - INTEREST PAYMENTS BASED ON GIC RATE

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:

Can a 212(1)(b) exemption available where interest payments to non-resident equal that of interest from funds received on deposit

Position:

Depending on the circumstances, including the business purpose

Reasons:

Facts may support exemption

					961831
XXXXXXXXXX					C. Tremblay

Attention: XXXXXXXXXX

July 2, 1996

Dear Sirs:

Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act")

This is in reply to your letter of June 13, 1996, and further to your letter May 22, 1995 and to our letter of May 6, 1996 (961278), wherein you discussed the terms of a debenture between a Canadian corporation issuer and a non-resident corporation holder who deal at each other at arm's length. You requested our interpretation of subparagraph 212(1)(b)(vii) of the Act as it applies to the situation outlined in your letter.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

It is a question of fact whether an interest payment on a debenture is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion. Generally, it remains our view that where an interest payment to a non-resident person is computed by reference to the investment income that the Canadian corporation earns, the interest will be considered computed by reference to revenue, profit, cash flow, or similar criterion.

Although it may be possible in some limited situations that a loan whereby a Canadian corporate borrower makes interest payments to a non-resident lender at the same rate of interest that the borrower receives on funds deposited with a Canadian bank would qualify for the withholding tax exemption, such a determination could only be made after a review of all the facts and circumstances, including the business purpose, of the specific arrangement.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch