15 August 1989 Income Tax Severed Letter AC74025 - Canada-China Income Tax Agreement

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.

Mr. R.G. D'Aurelio                      Specialty Rulings
                                          Directorate
Director                                K.B. Harding
Provincial and Inrternational           957-2129
  Relations Division
J. Wilson

Canada-China Income Tax Agreement (Agreement)

This is in reply to your memorandum of June 19, 1989 wherein you
stated that the    24(1)    has made deposits with the        
24(1) and have indicated that interest paid by the Canadian bank
to the     24(1)   should be exempt from withholding tax.

We are in agreement with your view that subparagraph (b)(iii) of paragraph 3 of Article 11 of the Agreement would appear to be the reason for such argument since it is our understanding that competent authorities of China and Canada have not agreed on any other situations covered by subparagraph (b)(iv) of paragraph 3 of Article 11 of the Agreement.

Based on the discussion in paragraph 3 of Article 11 of the "Commentaries on the Articles of the OECD Model" on the definition of the term interest, it would appear to include interest paid on cash deposits made to a financial institution. Since the term "interest" in the Agreement is basically similar to the OECD Model, we are of the view that the cash deposits made by the Bank of China to the Canadian bank would qualify as "debt-claims of every kind" and therefore would probably be considered as a loan.

In addition, a review of Falconbridge on "Banking and Bills of Exchange" states on page 759 that "... a "deposit" could, depending on the contractual terms, refer to money loaned to a bank in exchange for any kind of document evidencing such indebtedness, including ... bank passbooks". At page 339, Falconbridge also states "(b)ank borrowings take many forms. The commonest form is the receipt of money on deposit. A deposit is a loan by a customer to the bank". Accordingly, we are of the view that an argument could be made that a cash deposit qualifies as a loan for purposes of the Agreement.

In order for the 24(1) to qualify for the exemption form withholding tax provided under subparagraph 3(b)(iii) of Article 11 of the Agreement the interest must be paid "on a loan directly or indirectly financed ... by the 24(1) ...". (underlining for emphasis). Black's Law Dictionary defines the verb finance as

          "to supply with funds through the issuance of stocks,
bonds, notes, or mortgages; to provide with capital or loan money
as needed to carry on business".

in our view the interest-bearing deposits made by the 24(1) to the Canadian bank would not constitute a loan financed by the 24(1) but would merely represent the investments of excess funds with the Canadian bank.

In addition, a review of the background notes to the Agreement indicates in the original draft it was intended only to exempt interest arising in Canada and paid to a resident of China where the loan is similar to the type of loan that would be directly or indirectly financed or guaranteed by Canadian Export Development Corporation. It does not appear that the deposits made by the Bank of China to a Canadian bank meet this test. It is apparent that this limit was intended because if it was not, the Article could simply have exempted interest paid on all loans made by the 24(1) to a resident of Canada. For greater certainty, you may wish to assure yourself that the Canadian Export Development Corporation does not as a matter of practice invest its excess funds in deposits in foreign banks.

We trust this is adequate for your purposes.

M.A. Hiltz for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch