19 January 1981 Income Tax Severed Letter

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.

XXXX

January 19, 1981

Revenue Canada, Taxation 875 Heron Road Ottawa, Ontario

Att: Mr. Kevin J. Donnelly, Provincial and International Relations Division

Re: Article XI of the Canada-U.K. Treaty

Dear Sir:

I refer to my letter of December 18, 1980 addressed to Mr. P. Pinkus, Director, Provincial and International Relations Division and the reply over the signature of Mr. Pinkus dated January 12, 1981. I refer as well to our telephone conversation of January 16.

In the penultimate paragraph of your letter, the con- clusion is drawn that tax would indeed be imposed under the pro- visions of paragraph 212(1) (b) to the interest "paid by A from Canada to X in the United Kingdom". The purpose of this letter is to further clarify the factual situation to which my original question relates. It is also to underscore the importance of the matter and the anomalous result which would follow if the inter- pretation suggested should stand.

I believe that the facts are correctly set forth in the numbered paragraphs on the first page of your letter. However, the statement cited above, and in particular the reference to interest paid "from Canada", may suggest some misunderstanding.

XXXX

As a purely technical matter, I believe that the absence of an "other income" article in the Canada-U.K. Convention does present a problem in these circumstances. However, the result must surely appear strange. The U.K. lender, on your interpretation, is subject to Canadian tax under Part XIII at the rate of 15% if he lends Canadian dollars to corporation A in Canada. If he lends Canadian dollars to the U.K. branch of cor- poration A, and is paid interest by such branch, he is subject to Part XIII at the rate of 25%. This result, it would seem, arises not only in spite of but precisely because of the rule in Article XI of the Convention that such interest has a U.K. rather than a Canadian source.

Should your Department maintain its position that under the U.K. Convention interest borne by the U.K. branch of the Canadian borrower is not treaty protected and is subject to Canadian withholding tax at the rate of 25%, the repercussions could, I suggest, be quite serious. The new U.K. treaty is not the only one, in which provisions such as Article XI are found without a corresponding "other income" article. For example, at first blush it seems to me that the same interpretative problem could arise under the treaties with Switzerland and Italy.

Since, unbeknownst to me at the time, the U.K. treaty came into force the day before my original letter, this matter is of current not merely future or hypothetical concern. I would appreciate the opportunity to discuss the matter with yourself or responsible officials of the Department of Finance, at your con- venience.

Yours truly,

XXXX