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.
Principal Issues: Whether Part XIII tax is exigible if paragraph 212(13.1)(a) of the Income Tax Act does not apply and the debt does not qualify for the subparagraph 212(1)(b)(vii) exception?
Position: Depending on the facts and circumstances of the situation, Part XIII tax may be exigible.
Reasons: Based on the facts of the situation, one may look through a partnership to the partners as the persons who legally owe the debts of the partnership and pay the interest on such debts.
2004 IFA CRA Round Table
Technical Issues
Question #1
We understand that the Agency has recently considered some issues with respect to a tower structure in which a partnership had a debt owing to non-residents that did not qualify for the subparagraph 212(1)(b)(vii) exception. Could the Agency explain the situation it considered and the position that it developed?
CRA Response
In a recent advance income tax ruling request, the Canada Revenue Agency (the "CRA") was asked to rule that Part XIII tax was not exigible on certain interest payments made by a partnership. The general fact scenario is as follows:
Two taxable Canadian corporations formed a partnership (the "Partnership") in the U.S. The Partnership borrowed money (the "Loan") from a U.S. financial institution and used the borrowed money to acquire an interest in a U.S. limited liability company ("LLC"). LLC used the funds to make a loan to a related U.S. operating company. LLC was a disregarded entity for U.S. tax purposes while the Partnership checked the box to be treated as a corporation for U.S. tax purposes. The Partnership, in accordance with the partnership agreement, elected not to be a separate legal person under the law of the jurisdiction in which the Partnership was formed. The terms and conditions of the Loan were such that the interest on the Loan was not exempt from Part XIII tax pursuant to subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act").
The CRA concluded that provided that the Partnership did not earn any income from sources in Canada, paragraph 212(13.1)(a) of the Act would not apply to deem the Partnership to be a person resident in Canada. However, this did not mean that withholding taxes under Part XIII of the Act would not be exigible in respect of the interest paid by the Partnership on the Loan to the U.S. financial institution.
Based on the facts of the situation described in the ruling request, taking into consideration the foreign law under which the Partnership was formed, the provisions of the partnership agreement and the terms and conditions of the loan agreement between the Partnership and the U.S. lender, the CRA came to the conclusion that the partners of the Partnership were considered to be the payers of the interest on the Loan. In other words, depending on the facts of a particular situation, one can look through a partnership to the partners as the persons who legally owe the debts of the partnership and pay the interest on such debts. In other scenarios with different facts, the facts and circumstances of each particular case have to be examined to determine whether Part XIII tax is exigible and if it is, whether such tax is exempt under the provisions of the applicable Canadian tax convention.
Furthermore, where the facts of a particular situation support a look-through approach so that a Canadian resident partner is considered to have paid the interest, the first sentence of paragraph 6 of Article XI of the Canada-United States Income Tax Convention applies so that such interest is deemed to arise in Canada for purposes of Article XI. Generally, under these circumstances, the CRA is of the view that the second sentence of paragraph 6 of Article XI would not apply to re-source such interest to the U.S. unless the CRA is convinced that (i) investing in the interest in a wholly-owned subsidiary (i.e., LLC in this case) of the Partnership constitutes a business carried on by the Partnership through a permanent establishment in the U.S. (which is not normally the case where the Partnership is merely holding shares or interests in a wholly-owned subsidiary), (ii) the Loan was incurred in connection with such permanent establishment, and (iii) the interest paid on the Loan was borne by such permanent establishment. All these are fact-related issues that need to be examined on a case-by-case basis.
Prepared by Simon Leung
Date: May 7, 2004
File #: 2004-007213
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