11 July 1990 Income Tax Severed Letter AC74645 - Interest Payments of Subsidiary Deposits in Foreign Branches of Canadian Banks

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.

E.H. Gauthier                     Financial Institutions
Director                          Section
Special Audits Division
                                  M.M. Trotier

C.E. Bishop                       957-8957
Specialized Industries Section                                   

                                  7-4645

SUBJECT: Exemption under Treaties from Tax Under Part XIII
        of the Income Tax Act on Interest Payments of Subsidiary
        Deposits in Foreign Branches of Canadian Banks

This is in reply to your memorandum dated January 10, 1990 wherein you requested our opinion regarding inter-treaty country transactions. Provincial and International Relations Division have written to us concerning the intra-treaty country transactions in the context of Canada's treaties with Singapore, France, Germany, Barbados, Spain and Australia. A copy of this April 9, 1990 letter was sent to the attention of C.E. Bishop. As to Canada's treaties with Ireland and The Netherlands we understand that they will be informing you directly of their position concerning these two treaties.

Inter-treaty

The relevant treaty to be considered in inter-treaty situations
described below is that entered into between Canada and the
country in which the subsidiary is resident 24(1)          has
requested assistance in determining whether interest on deposits
would be exempt from Part XIII tax in situations similar to the
one reviewed by Specialty Rulings with respect to the Canada -
U.S.  Income Tax Convention ("US Treaty") as set out in the July
21, 1990 letter prepared by Keith Harding.

The hypothetical situation considered in the July letter and the situation this memorandum addresses deals with a Canadian bank with a worldwide branch and agency network which has several wholly-owned foreign subsidiaries. These subsidiaries, which we are assuming do not carry on business in Canada, place funds on deposit with non-Canadian branches of the Canadian hank. Such deposits for these purposes refer to temporary deposits by a subsidiary of its surplus funds.

The interpretation given in the July 21 letter was that provided paragraph 6 of Article XI of the US Treaty is applicable to a particular situation, Article XXII of the US Treaty would exempt the payments made by the non-resident branches of the Canadian bank to its wholly-owned subsidiaries in the U.S. from withholding tax in Canada.

Paragraph 6 of Article XI of the US Treaty states that "Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a State other than that of which he is a resident a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated and not in the State of which the payer is resident". Accordingly, if the conditions of paragraph 6 are met in the hypothetical situation, the interest will be deemed to arise in the country where the non-resident branch is located and not in Canada.

The term "State" is defined in Article III of the US Treaty to mean "any national State, whether or not a Contracting State". As a consequence paragraph 6 of Article XI of the US Treaty may have application to circumstances in which interest is paid by a Canadian Bank through a permanent establishment in a country other than the U.S.

We have considered the hypothetical situation with respect to payments of interest to foreign subsidiaries in the United Kingdom, Australia, Barbados, Singapore, France, West Germany, The Netherlands and Spain. In each of the relevant treaties, there is a provision similar to paragraph 6 of Article XI of the US Treaty, however, the application of this provision is limited to situations wherein the permanent establishment (i.e. branch) is located within the boundaries of the treaty partners. As a result, the interest article in each of these treaties would apply and the interest payments to the foreign subsidiaries would be taxable under Part XIII subject to the rate limitations provided for in these treaties.

The Ireland treaty does not contain a specific interest article. Paragraph 1 of Article VI of the Ireland treaty which appears to deal with interest payments limits the rate of Canadian tax to 15 per cent on interest derived from sources within Canada. It is not apparent to us on what basis 24(1) believes this provision would not apply with regard to this hypothetical example.

Intra-treaty

The intra-treaty situation is similar to the hypothetical situation described above for the inter-treaty situation except that the non-Canadian branch is located in the same country in which the foreign subsidiary resides.

The US and the United Kingdom ("UK") treaties have already been reviewed in the July 21, 1989 letter and the January 19, 1989 and May 17, 1989 letters to the, 24(1) copies attached). The position taken with respect to the UK transaction was arrived at by mutual agreement between the competent authorities of the UK and Canada.

We have reviewed the provisions of Canada's treaties with Singapore, France, Germany, barbados, Spain and Australia. Each of these treaties contain a provision dealing with interest which deems the interest to arise in the country where the non-resident branch is located and not in Canada. As an example, where an Australian subsidiary deposits funds with a Australian branch of the Canadian bank, the interest payments borne by the Australian branch will be deemed to arise in Australia by virtue of paragraph 5 of Article 11 of the Canada-Australia Treaty. ("Australia Treaty"). Since paragraphs 1 and 2 of Article 11 of the Australia Treaty do not deal with interest arising in Australia and paid to a resident of Australia, such an item of income will fall within paragraph 1 of Article 21 (Income not Expressly Mentioned) of the Australia Treaty. Paragraph 1 provides that items of income not expressly mentioned in the Australia Treaty shall be taxable only in the state of residence unless it arises in the other Contracting State. Therefore, provided paragraph 5 of Article 11 of the Australia Treaty would be applicable in a particular situation, then Article 21 of the Australia Treaty will exempt the payments made by the non-resident branch of the Canadian bank to its wholly-owned subsidiary in Australia from Part III tax in Canada.

The same reasoning would apply for the treaties between Canada and each of Singapore, France, Germany, Barbados and Spain.

for Director Financial Industries Division Rulings Directorate