19 November 1999 External T.I. 9732345 - LOANS TO NON-RESIDENTS - PART XIII TAX

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.

XXXXXXXXXX 	973234
		Tim Kuss
Attention: XXXXXXXXXX 

November 19, 1999

Dear Sirs:

Re: Subsections 15(2), 214(3), 227(6.1) and Article X of the
Canada - U.S. Income Tax Convention (the "Convention")

This is in reply to your letter requesting a technical interpretation regarding the application of the above-referenced provisions to the following hypothetical situation.

A Canadian partnership makes a loan to the U.S. parent ("USco") of a wholly-owned Canadian resident corporation ("Canco") which is member of the partnership. The loan remains outstanding for the requisite time for subsection 15(2) and paragraph 214(3)(a) to apply in respect of the loan.

You have asked what is the applicable withholding tax rate in respect of the dividend that is deemed to be paid pursuant to paragraph 214(3)(a). You have also asked for our opinion regarding the application of subsection 227(6.1) in circumstance where paragraph 214(3)(a) has applied in respect of the loan and the loan is then repaid to the partnership.

We provide the following comments.

Analysis and Discussion

Where paragraph 214(3)(a) is applicable, the amount of the loan shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada. The dividend is not deemed to have been paid by the particular corporation that is a member of the partnership. Therefore, it cannot be said that USco owns at least 10% of the voting stock of the company paying the dividend. As a result, subparagraph 2(a) of Article X of the Convention has not been satisfied and, by default, the appropriate withholding tax rate in respect of the deemed dividend is 15% of the gross amount of the dividend (subparagraph 2(b) of Article X of the Convention).

Where USco later repays the loan to the partnership, provided subsection 227(6.1) is otherwise applicable, the refund that USco will be entitled to is the lesser of (1) the amount of tax previously paid in respect of the loan and, (2) the amount that would be payable under Part XIII if a dividend equal to the amount of the loan repaid were paid by the partnership to USco at the time of the repayment. We emphasize that, for these purposes, it is the partnership (and not the particular corporation that is a member of the partnership) that is treated as paying such dividend. While a partnership could not normally pay a dividend, this fiction is simply for purposes of determining the amount of the refund. Similar with the analysis in the previous paragraph, USco would not meet the requisite ownership test in subparagraph 2(a) of Article X of the Convention and the appropriate withholding rate for purposes of determining the refund under subsection 227(6.1) would be 15%.

We hope our comments are of assistance.

Yours truly,

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