14 May 1998 External T.I. 9806385 - PART XIII TAX ON FEE

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: Is a "fee" which is calculated by reference to notional interest considered to be subject to withholding under paragraph 212(1)(b)(vii)?

Position: No

Reasons: Not considered to be "interest" or "in lieu" thereof as there is no borrowing by the payor.

XXXXXXXXXX 980638
J. P. Dunn

Attention:XXXXXXXXXX

May 14, 1998

Dear Sirs:

Re: Part XIII Tax on Fee

We are writing in response to your correspondence of March 13, 1998 wherein you had requested the views of the Department regarding a situation in which a fee is paid by a Canadian corporation to a United States corporation with which it deals at arm’s length, within the meaning of that term in subsection 251(1) of the Income Tax Act (the “Act”). More specifically, your question is whether, in the view of the Department, such fee would be subject to tax pursuant to paragraph 212(1)(b) of the Act “as, on account or in lieu of... interest”.

As we understand, the fee is paid in order to induce the foreign corporation to extend credit on favourable terms to foreign customers of the Canadian corporation and is calculated by reference to the interest foregone by the foreign corporation when such favourable credit is extended. There is, however, no borrowing by the Canadian corporation from the foreign entity at any time.

In general terms, it is the view of the Department that, notwithstanding that a fee may be calculated by reference to a notional amount of interest, the resultant amount does not assume the character of interest. Also, in the present situation, in that the fee is not related to a borrowing by the Canadian resident corporation, the amount would not be considered to be a payment of, or in lieu of, interest within the meaning of paragraph 212(1)(b) of the Act.

We trust that this is the information which you require.

Yours truly,

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