9 February 1988 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.

February 9, 1988

Mr. Kevin Ryan Revenue Canada

220-4th Avenue S. E. Calgary, Alberta T2G-OL1 Canada

Re: XXXX Dear Mr. Ryan:

XXXX

The Canadian Income Tax Act (the "Act") provides under section 212(1) that non-residents of Canada are subject to Canadian income tax at a 25% rate ". . . if a person resident in Canada . . ." makes certain payments to them. Interest is one of the payments subject to this section. The rate of tax in many cases is changed by an income tax treaty, and in this case at December 1985 the 1942 Canada/United States income tax treaty (the "Old Treaty") provided for a 15% tax rate. Section 215 of the Act, provides that the payor shall withhold the tax from the payment to the non-resident and remit it to the Receiver General on behalf of the non-resident.

XXXX

would nave been required to withhold income tax only if they were Canadian residents. Since both were United States corporations which were controlled and managed from the United States, they normally would not be considered to be Canadian residents. However, since they both had oil and gas exploration and production activities in Canada, section 212(13.2) of the Act deemed them to be resident in Canada for the purposes of Part XIII of the Act. Section 212(13.2) of the Act provides:

"For the purposes of this Part, where in a taxation year

(a) a non-resident person whose business was carried on principally in Canada, or

(b) a non-resident person who

(i) manufactures or processes goods in Canada,

(ii) operates an oil or gas well in Canada, or

(iii) extracts minerals from a mineral resource in Canada

pays or credits an amount (other than an amount to which subsection (13) applies) to another non-resident person, he shall be deemed, in respect of the portion of that amount that was deductible in computing his taxable income earned in Canada for any taxation year, to be a person resident in Canada."

The use of the past tense "was deductible" in the above subsection 212(13.2) means that withholding is required for interest only when it has been deducted. Section 18(9)(a)(i) of the Act provides that notwithstanding any other provision of the Act no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred on account of interest in respect of a period after the end of the year. XXXX Therefore XXXX would not have been allowed and did not take a 1985 deduction for the prepaid interest. Such amount is being amortized and deducted in years subsequent to 1985 pursuant to section 18(9)(b) of the Act. Therefore, withholding of tax was not required.

In addition to the above explanation, the Old Treaty provided for a favorable result. Article XII of that treaty provided that with respect to the interest prepayment the recipient, XXXX was "... exempt from all taxes imposed by Canada." This was because both the payee XXXX and the payors, XXXX were organized under the laws of the United States and their businesses were not managed and controlled in Canada. These provisions applied to the prepaid interest transaction made on December 30, 1985. The appropriate portion of Article XII read:

"Dividends and interest paid by a corporation organized under the laws of the United States of America whose business is not managed and controlled in Canada to a recipient, other than a resident of Canada or a corporation whose business is managed and controlled in Canada, shall be exempt from all taxes imposed by Canada."

Please note that pursuant to Article XXX of the Canada/United States 1980 Tax Convention, Article XII of the Old Treaty could be applicable, at the option of the taxpayer, for the 1985 taxable year.

You requested certain interest rate information.

XXXX

If you have any questions concerning this matter, please feel free to telephone me at XXXX

Very truly yours.

XXXX