20 October 1992 Income Tax Severed Letter 9221042 - Interest Paid by Permanent Estaplishment

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.

922104
24(1) K.B. Harding
957-2111

Attention: 19(1)

October 20, 1992

Dear Sirs:

Re: Article XI of the Canada-U.S. Income Tax Convention

This is in reply to your letter of July 7, 1992 wherein you requested our opinion on the application of Canadian withholding tax in the following hypothetical situation.

Canco is a taxable Canadian corporation which is wholly owned by Usco, a United States public corporation. Canco carries on a portion of its business (a division) in the United States through a permanent establishment. Usco will grant a loan to Canco's U.S. operation and the funds will be disbursed directly to the U.S. division where it will be recorded in the books of that division as a loan to Usco. All of the interest will be paid out of the earnings of the U.S. division and such interest will be allowable as a deduction in computing the income of the permanent establishment for U.S. purposes and will therefore be "borne by" the U.S. permanent establishment.

Paragraph 6 of Article XI (Interest) of the Canada-U.S. Income Tax Convention (the "Convention") clearly provides that for purposes of

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

Article XI of the Convention that interest is deemed to arise in the United States and not in Canada in the situation described above. However, since Article XI of the Convention only deals with interest arising in one of the Contracting States and paid to a resident of the other Contracting State, that article would not deal with the interest arising in the hypothetical situation set out above since in that situation we are concerned with interest arising in the United States and paid to another resident of the United States.

Since the sourcing rule set out in paragraph 6 of Article XI is applicable only for the purposes of Article XI of the Convention, it does not change the Canadian sourcing rules for purposes of Article XXII (Other Income) of the Convention. However, the Technical Explanation to the Convention, as it relates to paragraph 6 of Article XI, implies that the interest paid by Canco to Usco in the hypothetical situation described above will be deemed to be sourced in the State where the permanent establishment is situated and not in the payer's State for the purposes of Article XXII of the Convention.

Accordingly, in the hypothetical situation set out in your letter the interest paid by Canco to Usco will be sourced to the United States and not to Canada for purposes of Article XXII of the Convention and will not be subject to withholding tax in Canada.

We trust the above will be of assistance to you.

for Director Reorganizations and Non-resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information