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.
Dear Sirs:
This is in reply to your letter of May 8, 1991 in which you requested our views on the application of subparagraph 4(a) of Article 11 of the Canada-Netherlands Income Tax Convention (the "Convention").
Our understanding of the situation which you described is that interest on a loan is paid by a company resident in Canada for the purposes of the Convention to a company which is resident in the Netherlands for the purposes of the Convention. The lender is related to the Canadian borrower pursuant to section 251 of the Canadian Income Tax Act (the "Act"). You questioned whether the interest exemption provided under subparagraph 4(a) of Article 11 of the Convention would be available where it can be established that the two companies deal with each other on an arm's length basis in establishing and maintaining the loan.
The term "arm's length" is not defined in the Convention but paragraph 2 of Article 3 of the Convention provides that "... any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of the State concerning taxes to which the Convention applies."
There is also no precise definition for the term "arm's length" in the Act. However, paragraph 251(1)(a) of the Act states that "... related persons shall be deemed not to deal with each other at arm's length". In our opinion, this paragraph must also be used for the purposes of interpreting the meaning of the term "arm's length" in the Convention. Therefore, since the parties described above are related, they cannot, for purposes of either the Income Tax Act or the Convention, be considered to be dealing with each other at arm's length even in a situation where it can be established that the two parties deal with each other on an arm's length basis in establishing and maintaining a particular loan.
Accordingly, the interest paid in the situation described above would not qualify for the exemption provided in subparagraph 4(a) of Article 11 of the Convention.
As a matter of interest, it is a question of fact whether persons not related to each other deal with each other at arm's length and such a determination can only be made after reviewing all of the relevant facts and circumstances of a particular situation. We are enclosing a copy of Interpretation Bulletin IT-419 which discusses the meaning of "arm's length" plus a copy of Interpretation Bulletin IT-361R2 which deals with a similar interest exemption under subparagraph 212(1)(b)(vii) of the Act.
We trust these comments will be of assistance to you.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1991
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1991
Email this Content