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.
T.B. Kuss (613) 957-2120
November 12, 1986
Dear Sirs:
Re: Canada-Brazil Income Tax Convention (the "Treaty")
We would like to clarify our position stated in our letter dated February 27, 1986 which was in response to your letter of December 19, 1986.
We have a number of comments regarding the calculation of gross interest income subject to withholding. In this instance we will assume that paragraph 3 of Article 22 of the Treaty is applicable, i.e. interest on Brazilian loans is received directly in Canada.
Where taxes have been deemed by paragraph 3 of Article 22 to be paid at a rate of 20%, but no taxes were actually paid to Brazil, it is our opinion the deemed amount should not be included in income for Canadian income tax purposes. The deemed tax would be calculated as 20% of the interest actually received. To the extent that taxes were withheld and remitted by the borrower on behalf of the Bank, the net interest received should be grossed up by the amount of tax remitted in determining the Bank's gross interest income for Canadian income tax purposes and for determining the "gross amount of income paid in Brazil" for purposes of paragraph 3 of Article 22 of the Treaty.
As a concluding comment we would like to draw your attention to the second last paragraph of our letter of February 27. This paragraph deals with the reimbursement of tax by the Brazilian government to Brazilian borrowers and its effect on the amount of tax paid in Brazil for purposes of calculating a foreign tax credit in Canada. Our reference in the first sentence to "a Canadian borrower" should of course read "a Canadian lender."
We apologize for the confusion and hope these comments have clarified matters.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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