(2)-(14)

A financial institution (the "Issuer") will accumulate a pool of mortgages [presumably CMHC-guaranteed in most cases] and sell an undivided interest in the mortgages to investors (the "Investors"). The mortgages will be sold, on a fully-serviced basis, by the Issuer for a single aggregate consideration, with respective undivided beneficial ownership interests in such pool represented by written instruments.

The ruling summary states that:

The interest paid is considered to be 'fully exempt interest' as defined in subsection 212(3) of the Act for the purposes of subparagraph 212(1)(b)(i) of the Act.

In a departure from 2009-0320231C6 (which indicated that there generally will be no excess under s. 214(7) on the conversion by the original holder of a “traditional” convertible debenture), CRA stated that, where there is a conversion of a standard convertible debenture issued by a Canadian public entity (i.e., taxable Canadian corporation, resident trust or Canadian partnerships), in general there will be an excess under s. 214(7) equal to the amount by which the fair market value of the common equity received on the conversion exceeds the price for which the debenture was issued. This new position applies prospectively to convertible debentures issued after December 3, 2024.

However, CRA is still of the view that the deemed payment of interest on standard convertible debentures under s. 214(7) does not generally constitute “participating debt interest” as defined in s. 212(3).

A s. 214(7) excess received by a holder of a convertible debt who did not deal at arm’s length with the issuer would not qualify for exemption under s. 212(1)(b)(i)(A). CRA indicated that a convertible debenture issued to a non-arm’s length person prior to December 3, but with that conversion feature having not yet been exercised, would essentially be grandfathered.

Proposed Note issuance

A Canadian public corporation (ACO), whose common and preferred shares are traded on an exchange, will issue unsecured and unsubordinated notes to non-residents with whom it deals at arm’s length. The issue price will equal the Note’s principal and will correspond to the value of a ‘Reference Stock” on the date issued. The Reference Stock will be proposed by the noteholder but must be a listed stock of a non-resident issuer dealing at arm’s length with ACO and must have a correlation to ACO’s common shares that is lower than that of the S&P 500 index to ACO’s common shares. The Notes will bear interest at a stipulated rate expressed as a percentage of the Principal Amount.

At maturity, ACO will pay an amount equal to the closing price of the Reference Stock if it does not exceed the “Cap Price,” and otherwise will pay the Cap Price. ACO may elect to repay the Note at maturity with Reference Stock.

Ruling

S. 212(1)(b)(ii) will not apply to payments of interest described above or in respect of the Maturity Date made in cash or in Reference Stock.

The CRA summary stated:

Neither the payments of interest, nor payments on Maturity constitute "participating debt interest" under 212(3) because, consistent with the policy of the provision, the payments are not tied to the profitability of the issuer. In other words, the payments do not represent a disguised payment of profits out of Canada.

When asked to provide an update on its views expressed in 2013-0509061C6 on whether convertible debentures give rise to participating debt interest that is subject to Part XIII tax, CRA indicated:

• Since then, CRA has only issued 2014-0532411R3 (making amendments and adding an opinion regarding 2011-0418721R3) and 2013-0514551R3.
• 2014-0532411R3 provided that any amount deemed by s. 214(7) to be interest on the note conversion would not be participating debt interest, and would not be subject to Part XIII withholding tax (assuming the arm’s length test was satisfied) – and provided an opinion that in the event of a disposition of the convertible note by a non-resident to a resident (other than the issuer) for cash proceeds, the amount deemed to be a payment of interest under s. 214(7) would not constitute participating debt interest.
• 2013-0514551R3 provided similar rulings, which were also applicable to make-whole amounts.
• At 1 May 2009 IFA Roundtable Q. 12, 2009-0320231C6, CRA stated that, where there is a conversion of a traditional convertible debenture by its original holder for common shares of the capital stock of the issuer, there would generally be no excess under s. 214(7). However, since then, there has been additional information to be considered. For example, a 2010 Joint Committee submission stated that, in such a situation, the conversion premium realized on conversion or sale of a convertible debenture would constitute such an excess.
• Furthermore, the Agnico-Eagle decision has forced a CRA review of its position which, when completed, will be provided to the CTF, with any changes being applied only on a prospective basis.
• Finally, CRA is still of the view that the deemed payment of interest on convertible debentures under s. 214(7) arising on their transfer by a non-resident to a resident in Canada does not generally constitute participating debt interest, assuming the parties are dealing at arm’s length.

In order to fund general corporate purposes, ACo will issue senior unsecured notes on a private placement basis for 100% of their principal amount and bearing an annual coupon of a stipulated percentage of the principal. On maturity, the “Final Redemption Amount” required to be paid by ACo will equal the product of the Principal Amount, and an index reflecting the price performance of the specified commodity (the “Underlying”) between the “Strike Date” (shortly before the issue date) and the “Final Redemption Date” (shortly before maturity). The Final Redemption Amount will be payable in cash unless a Noteholder timely elects for physical settlement. A calculated “Early Redemption Amount” is payable on default. ACo likely will hedge its exposure under the Notes through options or other available hedging instruments.

CRA ruled that s. 212(1)(b)(ii) will not apply to any payments of the interest coupons or to any payments on maturity or earlier redemption. The rationale stated in the CRA headnote is that:

The commodity is not sufficiently linked to the profitability of the issuer’s business.

Loan terms

Canco will borrow funds from an arm’s length lender resident in a Treaty country under a term loan (the “Loan”) with required periodic principal repayments. The Loan Agreement (which contains a gross-up clause provides for the payment of regular “Periodic Interest”, which will be equal to a “Quoted Rate” for specified types of deposits at the commencement of each interest period plus a specified number of basis points. In addition, if at the end of any “Additional Payment Period” (of a specified number of months), the trailing average of the reference commodity exceeds the specified trigger price, an “Additional Payment” calculated by applying the “Applicable Rate” for that period to the outstanding principal at the start of that period, will be required to be made. The Applicable Rate is a minimum of X%, and increases in specified increments as the reference price crosses specified thresholds. The proceeds will be lent by Canco to its subsidiary to fund work on a project, and will be secured by property of Canco in addition to property of the subsidiary. Canco also may be required to prepay the loan if the reference price exceeds specified levels.

Ruling

S. 212(1)(b)(ii) will not apply to any payment of Periodic Interest provided that at the time of payment no Additional Payment had become payable by Canco at or before that time as a result of the trigger date therefor having occurred - and once such Trigger Date has occurred such that an Additional Payment is paid or becomes payable on the Loan, all subsequent payments of Periodic Interest will be subject to Part XIII withholding tax.

CRA reasons (in its summary)

The definition of a "participating debt interest" refers to interest "that is paid or payable on an obligation, all or any portion of which …". Since a contingent amount would not be considered "payable," until an additional payment is paid or becomes payable, the periodic interest would not be considered participating debt interest. However, once an additional payment is paid or becomes payable, the periodic interest on such obligation would be considered participating debt interest from that point of time onwards.

CRA ruled that interest was not participating debt interest respecting subordinated notes with conventional terms other than that, on a redacted specified event (presumably respecting a shaky financial condition, as defined) the notes would be automatically converted into preferred shares based on a pre-determined conversion ratio. In particular, the notes were to bear interest at a fixed annual rate until the Interest Reset Date, after which they will bear interest on a specified basis plus a fixed spread. No interest on the Notes will accrue or be payable after the “Mandatory Event.”

An amount payable to a lender on specified events such as an IPO and computed as X% of a modified computation of NAV was found by CRA (after referring to its positions on the predecessor of the similarly worded participating interest definition) to be excluded from eligibility for deduction udner s. 20(1)(e)(iv.1) as being computed by reference to a "similar criterion," i.e., the equity value of the enterprise as a function of profitability and cash flow. A factual finding of Audit that this amount “was used as a substitute for a direct equity investment that the Lender originally wanted but could not acquire” was also germane. Finally, it did not make any difference that the borrower resisted paying the amount, so that what it ended up paying was pursuant to a negotiated settlement of what it owed under the formula.

CDS trust entered into credit default swaps (CDS) with a counterparty (a non-resident Bank) desiring credit protection for its bond portfolios and funded its purchase of the required collateral for its CDS obligations by issuing short-term notes. It defaulted on those notes in the 2008 financial crisis.

It settled litigation with the bank under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank (which in the meantime had acquired some of the Notes directly and through non-resident subsidiaries) made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.)

CRA ruled that the payments of interest by the Trust to the Bank (and non-resident subsidiaries of the Bank) will not be "participating debt interest," stating:

The fact that interest would be paid by the Trust based on the available cash in the Trust…(i.e., the fact that the Trust will not be able to pay all the interest it owes…) does not impact the conclusion that the interest on the Notes is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.

See more detailed summary under s. 212(1)(b).

Aco, a public corporation, will issue (at no discount or only a shallow discount) the "Notes" which: will rank equally with its other unsecured debt; will bear interest at specified fixed or floating rates, will not (in the case of the fixed rate Notes) be redeemable before the first interest reset date (except on the occurrence of specified events) and will be automatically converted into common shares based on a predetermined conversion formula (presumably at the point of non-viability as defined by OSFI, subject to regulatory discretion), so that there is no assurance that the conversion formula would result in the issuance of common shares having a fair market value at least equal to the principal.

Rulings

: Interest is not participating debt interest; s. 20(1)(c) deductibility of interest (subject to standard conditions);.

Aco, a pubic corporation, will issue units consisting of convertible debentures (teh "Pubic Debentures" and warrants to acquire its common shares. The Public Debentures:

• mature XX years from the issue date
• bear fixed interest payable semi-annually, at the option of Aco, in cash or in class A shares ("common shares") calculated by dividing each interest amount by the current market price on the date falling XX days prior to the interest payment date
• are convertible into common shares at the option of the holder until shortly before maturity at a fixed conversion price (subject to anti-dilution protection)
• on conversion holders will receive accrued but unpaid interest and a "Make-Whole Amount" (payable in common shares or in cash where the Exchange limits payment in shares) in respect of lost future interest, but with a reduction of XX% for each XX% that the current market price at the time of conversion exceeds the conversion price
• Aco has the right to require conversion following the X anniversary

Concurrently with the above public offering Aco makes placement of subscription rights by private placement to "USco" comprising "Private Debentures" and warrants with "substantially similar" terms (but with expanded ability to pay the make-whole in cash). The Private Debentures and warrants may not be converted or exercised if that would result in USco holding more than XX% of the common shares.

Rulings

The payments made by Aco to the Debenture holders are not "participating debt interest." S. 212(1)(b) of the Act will not apply to the conversion of any of the Public Debentures or Private Debentures held by a non-resident of Canada or by virtue of any interest payment or any Make-Whole Amount under the Public Debentures or the Private Debentures, provided that the holder of the debenture deals at arm's length with Aco.

[R]egular periodic interest payments made by public corporations pursuant to the terms and conditions of standard convertible debentures do not generally constitute "participating debt interest"… .

[T]he deemed payment of interest on standard convertible debentures under subsection 214(7) of the ITA that arises because of a transfer or assignment of standard convertible debentures by a non-resident person to a person resident in Canada (including the issuer of the debenture), does not generally constitute "participating debt interest". …

CRA is not inclined at this time to take the position that standard convertible debentures would in general constitute "excluded debt obligations" pursuant to paragraph 214(8)(c) of the ITA.

"CRA cannot provide certainty concerning the application of Part XIII tax to the very broad range of situations in which convertible debentures can be issued" and taxpayers are encouraged to seek advanced income tax rulings to resolve any concerns.

The Corporation, a "mortgage investment corporation" under s. 130.1(6), pays dividends which take into account, inter alia, its income and financial conditions. Such dividends are deemed by ss. 130.1(2) and 214(3)(e) to be paid to the shareholders "as interest on a bond." In refusing to rule that the interest was not participating debt interest (PDI), CRA stated:

[T]he dividends paid from the Corporation, which are deemed to be interest, were computed by reference to the income, profit, cash flow or other similar criterion described in the definition of PDI. Accordingly, the deemed interest payments would meet the condition that they are interest paid on an obligation and that they are of a participatory nature described in the definition of PDI.

amendments made by 2014-0532411R3 shown in italics

PUBCO, which is a listed public corporation and a taxable Canadian corporation, completed an offering of Convertible Notes, including Convertible Notes ("Class XX Notes") purchased on behalf of ACO, which is a non-resident corporation which deals at arm's length with PUBCO.

The Class XX Notes:

• were not issued at a discount and pay no premium
• are payable in US dollars
• have a specified maturity date for payment of the aggregate principal together with accrued interest
• bear interest of XX% payable semi-annually, subject to a gross-up clause
• are convertible into common shares (having a stated capital equal to the converted principal) at the option of the holder at the conversion price at any time prior to the earlier of the maturity date and the business day preceding the date which PUBCO has specified for their redemption (see below)
• a cash payment is made in lieu of the issuance of a fractional share on conversion
• accord PUBCO, in the case of a conversion request received from the BCO group, to elect to satisfy its obligations by delivering common shares in its capital stock at the Conversion Price or the cash equivalent thereof (based on their then market price)
• are redeemable by PUBCO for their principal and accrued interest at any time before maturity provided that the current market price of the PUBCO common shares is at least x% of the conversion price
• do not give PUBCO the right to pay the redemption price with common shares

Rulings

that the regular semi-annual interest payments will not be "participating debt interest" and that their payment to ACO will not be subject to Part XIII tax provided PUBCO deals at arm's length with ACO at the time of the payments. Supplementary ruling that "any amount deemed to be a payment of interest on a Class XX... Note under subsection 214(7) as a result of a conversion of the ... Note into Common Shares ... will not be subject to Part XIII withholding tax under paragraph 212(1)(b)" on the same arm's length assumption.

Opinion.

[On] a disposition of a Class XX... Note by ACO to a person resident in Canada (other than PUBCO) for proceeds of disposition payable in cash, any amount deemed to be a payment of interest on a Class XX...Note under subsection 214(7) would not in general constitute "participating debt interest"... .

Traditional convertible debentures are: unsecured subordinated obligations of a public corporation issued in Canadian dollars for their face value; bear interest (payable at least annually) at a fixed rate; provide a fixed conversion price (or ratio) in excess of the current market price on the issue date; and are redeemable by the issuer at the face value, plus accrued and unpaid interest, on the specified maturity date. CRA stated:

Where there is a conversion of a traditional convertible debenture by its original holder for common shares of the issuer, … in general there would be no Excess under subsection 214(7)… . Accordingly, no amount is deemed to be a payment of interest by the issuer (person resident in Canada) to the non-resident person for the purposes of Part XIII. For the purpose of paragraph 214(7)(d) of the ITA, the price for which the traditional convertible debenture is assigned on the conversion, is the amount determined by multiplying the fixed conversion price by the number of shares received on the conversion, that is, an amount corresponding to the face value of the traditional convertible debenture.

Where (in order to reflect the resulting increased credit worthiness of the borrower) the interest on a loan decreases as the ratio of debt to EBITDA of the Canadian borrower decreases, such interest will not be considered to be participating debt interest. CRA stated:

"Participating debt interest" as defined in subsection 212(3) of the Act is, very generally speaking, interest that depends on the success of the payer's business or investments. ...

In ... 2005-0161521R3 ... the interest payable was referenced to, inter alia, an applicable margin based on the borrower's total leverage ratio. We ruled favourably because the extra amounts payable simply used EBITDA as a tool to assess creditworthiness. As the borrower became more profitable, its payments decreased, and, in our view, this reflected the opposite of participating debt. Today, we are of the same view, and, generally, where the interest rate is capped and any reduction thereto would be intended as a reflection of the creditworthiness of the borrower, the interest would not constitute "participating debt interest" within

Where holders of notes receive at maturity a return linked to the performance of three mutual funds, the post-amble under s. 212(1)(b) will not apply so as to deny the availability of exemption in s. 212(1)(b)(vii). The issuer was not related to the mutual funds nor were the profits of the mutual funds linked to the issuer.

An interest rate under a term facility intended to qualify for the exemption under s. 212(1)(b)(vii) was equal to LIBOR plus a spread which decreased as the leverage (measured by the ratio of funded debt of the borrowers to EBITDA) decreased. CRA ruled this arrangement did not cause the post-amble to s. 212(1)(b) to apply. Although the interest payable varied as a result of changes in EBITDA, the extra amounts payable simply used EBITDA as a tool to assess creditworthiness and, as the borrower became more profitable, payments decreased, which was the opposite of participating debt.

A loan amendment would provide that the interest rate would increase if the debt to EBITDA ratio exceeded 3.0. Would the former exclusion from exempt status under s. 212(1)(b)(vii), where there was participating interest, apply? CRA stated:

[A] loan agreement that contains a provision for increased payments to the lender that are based on the ratio of certain debt to EDITDA (earnings before interest, tax, depreciation, and amortization) of the borrower may fall within the ambit of the broad wording in the postamble of subparagraph 212(1)(b)(vii) of the Act. However, there may be situations where, in the context of an audit or an advance income tax ruling request, the provisions of a particular loan agreement and the circumstances of that borrower are such that subparagraph 212(1)(b)(vii) of the Act may not be applied.

CCRA "would not generally consider interest that is computed by reference to a stock index as satisfying the exception conditions described in the postamble to paragraph 212(1)(b) ... as long as the Agency is satisfied that the particular index chosen is not influenced by the inclusion in that index of the shares of the issuing corporation, corporations related to the issuing corporation or a corporation or corporations whose primary business is substantially similar to that of the issuing corporation ... [O]ur response is predicated on the understanding that the return on the obligation does, in fact, represent 'interest' on the obligation."

Before concluding that it generally would be acceptable for the interest rate on a debt instrument to vary in accordance with the value of a foreign currency, the Directorate stated "although foreign currency can be bought and sold and as such could be considered a commodity, it is our position that in the context of the paragraph 212(1)(b) postamble, 'commodity price' should not be considered to include foreign currency fluctuations, but rather in general is to be limited to, for example, prices for tangible commodities ...&nbsp."

To date the Directorate has not adopted a position that would extend the position in ITT in No. 11 to debt linked to a stock index such as the Dow Jones Industrial Average.

Non-resident Parentco and its subsidiaries, including Canco, have a notional cash pooling arrangement that has been established with an arm’s-length financial institution (the “Bank”) not resident in Canada, under which the Bank has the right to offset overdraft balances of any pool participants against deposit balances of other pool participants without prior notice. In the absence of this set-off ability, the Bank could be required to treat the overdraft balances as non-performing loans for regulatory purposes. Canco has an overdraft balance on its pool account and has overdraft interest charges owing to the Bank. Does the Bank’s right to offset the deposit balances of other pool participants against Canco’s overdraft balance constitute a “specified right” within the meaning of subsection 18(5)? CRA responded:

[T]he deposit balances of the non-resident pool participants would be considered “intermediary debts” for the purposes of subparagraphs 18(6)(c)(i) and 212(3.1)(c)(i), with the result that the back-to-back loan rules would be engaged, provided its other conditions are met. We find support for this position…in the Department of Finance Explanatory Notes…which contain an example that seems…exactly on point.

…[Given] that such notional cash pooling arrangements would be caught under subparagraphs 18(6)(c)(i) and 212(3.1)(c)(i), it is not necessary to consider the possible application of the specified right rules contained in subparagraphs 18(6)(c)(ii) and 212(3.1)(c)(ii).

In order to obtain the agreement of arm’s length non-resident financial institutions to a sale of the shares of Canco to the non-resident purchaser, Canco paid “Consent Fees” to them, which were calculated as a percentage of the amount owing under each Credit Agreement. In finding that the Consent Fees were not management fees, the Directorate stated:

The Minister of Finance said at the time of the enactment of paragraph 212(1)(a) that… a management or administration fee or charge is to be regarded as an amount paid for advice or direction pertaining to the operation or administration of a company, not including an amount paid for services to an independent firm and, per subsection 212(4), not including specified amounts paid for identifiable services such as transportation, insurance, advertising, accounting and research. …

[T]he Consent Fees are not management or administrative fees or charges…[and] are simply paid to retain the outstanding Credit Agreements.

A US LLC ("Corporation C"), whose sole member was a US corporation qualifying for benefits under the Canada-US Convention, ran a platform for the provision of "Digital Content" (movies, television shows, music videos, documentaries and similar audio-visual content) which it (and affiliated corporations) were permitted to distribute under content licence agreements with the third-party holders of the copyright. Canadian distributors (described as "Customers") created online storefronts for Canadian individual home users, running on Corporation C's platform, with customized design and branding for the Canadian Customers. Although the home users were licensed the right to receive Digital Content by virtue of agreements they entered into only with the Canadian Customers, it was Corporation C which collected the fees from them and operated the "online store," and it was stated in the description of facts to be the beneficial owner of those payments.

CRA ruled that monthly fees paid by the Customers to Corporation C for managing and maintaining components of the Customers' storefronts, for continuing access to the sales platform, and related support services, were (to the extent they otherwise could be considered to be management or administration fees or charges) not subject to Part XIII tax under s. 212(1)(a) by virtue of s. 212(4)(a) (as well as ruling that fees collected from Canadian home users were exempt from Part XIII tax under Art. XII(3)(a) of the Convention).

A non-resident reinsurer of Canadian risks may be required to place property in trust in Canada (a "Reinsurance Trust"). Proposed s. 212(9)(d) provides that dividends or interest distributed to beneficiaries of a Reinsurance Trust will not be subject to Part XIII tax where they would not have been subject to Canadian tax had they been paid directly to non-residents. Although s. 227(6) provides a procedure for recovering the amounts paid under such circumstances, how will the corporation recover the amounts paid before the 2-year period under s. 227(5) back to the 1 January 2000 effective date? CRA responded:

The CRA's application of such a retroactive measure for the purposes of Part XIII appears to be limited by the application of subsections 227(6) and 227(7). In this regard, the CRA is exploring possible avenues for the implementation of this type of retroactive measure. The CRA is currently conducting consultations and plans to announce its position to APFF members as soon as it finishes its analysis.

CRA indicated that the exemption as then worded did not apply if a provincial rather than federal authority was the party to the reinsurance indenture – but this matter was under consideration by Finance.

Annual payments made by a non-resident person carrying on business in Canada to a non-resident software supplier for updates, maintenance and servicing of computer software would not qualify as payments of "rent" and, accordingly, would not come within s. 212(13)(a). A review of judicial decisions indicated "that rent is generally a fixed payment (usually periodic) for the use of property for a given period of time, after which the right to use the property would extinguish (i.e., the right would be reverted back to the owner ... [O]nly in rare and unique situations would the word 'rent' be considered to mean 'royalty'".

As part of the consideration for the drop-down of the assets of a Canadian partnership (whose partners were Canco and its wholly-owned Canadian subsidiary) to a wholly-owned U.S. subsidiary (“Debtor Affiliate”), Debtor Affiliate assumed the loan including accrued interest thereon that had been owing by Partnership to another Partnership subsidiary (“Creditor Affiliate”), and Creditor Affiliate released the Partnership from its obligations on the Loan.

The Rulings Directorate indicated that this transaction likely entailed a novation of the loan, and that Part XIII tax thereby applied under s. 212(1)(b) and s. 212(13.1)(a) at that time on the amount of the accrued interest on the basis that:

[A]t the time of this novation, the Partnership would be considered to have made a payment or credit in kind of the Accrued Interest to the Creditor Affiliate by delivering the Debtor Affiliate’s covenant to make the payments under the Loan agreement to the Creditor Affiliate.

An LP organized in the U.S. but having only Canadian-resident partners, and whose only source of income is dividends and other investment income on non-Canadian securities, borrows money from a U.S. financial institution for use in those investing activities. CRA stated:

[P]aragraph 212(13.1)(a) … would not apply … to deem LP to be a person resident in Canada because LP does not appear to have any income from sources in Canada. However, this does not mean that withholding taxes under Part XIII of the Act would not be exigible in respect of the interest paid by LP to the U.S. financial institution.

…[D]epending on the facts of a particular situation, one can look through the partnership to the partners as the persons who owe the debts of the partnership and who pay the interest on such debts. If this occurs, since at least one of the partners of LP is a Canadian resident and the interest is paid to a U.S. person, Part XIII tax is exigible, unless such payment is exempt from Canadian taxation under a provision of the Act (such as subparagraph 212(1)(b)(vii)) or the Convention. In this regard, Canadian jurisprudence generally supports the look-through approach where subsection 96(1) of the Act is not applicable.

In the context of a ruling request respecting a "tower" structure, a partnership of which two taxable Canadian corporations were the partners borrows money from a U.S. financial institution in order to acquire an interest in a U.S. limited liability company.

The CRA concluded that provided that the Partnership did not earn any income from sources in Canada, paragraph 212(13.1)(a) of the Act would not apply to deem the Partnership to be a person resident in Canada. However, this did not mean that withholding taxes under Part XIII of the Act would not be exigible in respect of the interest paid by the Partnership on the Loan to the U.S. financial institution.

…[T]aking into consideration the foreign law under which the Partnership was formed, the provisions of the partnership agreement and the terms and conditions of the loan agreement between the Partnership and the U.S. lender, the CRA came to the conclusion that the partners of the Partnership were considered to be the payers of the interest on the Loan. In other words, depending on the facts of a particular situation, one can look through a partnership to the partners as the persons who legally owe the debts of the partnership and pay the interest on such debts.

A partnership between two equal arm's length partners (a Canadian corporation and a non-resident corporation) carrys on an active business entirely outside Canada. Royalties paid by it to a non-resident corporation that is owned equally by the two non-resident parents of the two partners are deductible in computing the income from that business. The Directorate stated:

[A]ssuming the royalties are not deductible by the BD partnership in computing its income from a source in Canada, by virute of paragraph 212(13.1)(a), the BD Partnershp will not be considered to be a person resident in Canada for purpoes of Part XIII ... . Accordingly, tax wil not be exigible under paragraph 212(1)(d) ... .

For purposes of determining whether income is earned on a reserve, income from sources other than those enumerated in IT-62 generally will be considered to have their source at the payor's principal place of business, e.g., the head office of a payor bank.

A Canadian partnership formed in Canada earns income from U.S. sources. Interest on a borrowing from a non-resident lender is deductible in computing the partnership's income under Part I from the income earned in the U.S. The Department stated:

[S]ince the interest expense would be deductible in computing income from a source that is not in Canada, the partnership is not deemed to be a person resident in Canada pursuant to paragraph 212(13.1)(a) … . The partnership is therefore not required to withhold tax under paragraph 212(1)(b) … .

S. 212(13.1)(a) would not apply to mortgage interest paid by a mooted Canadian partnership due to grandfathering. The Department stated:

With the exception of subsection 212(13.1) of the Act, there is no provision in the Act which deems a partnership to be a person, notwithstanding that section 96 provides that the income of a member of a partnership is computed as if the partnership were a separate person resident in Canada. We would not look through the partnership to apply Part XIII tax on the proportion of the payments that would apply to the Canadian partners.

Where a Canadian-resident tenant pays rent

to a partnership that has one or more partners who are not resident in Canada…the [Part XIII] withholding applies to the full amount of the payment even though some members of the partnership are residents of Canada.

Respecting the application of s. 212(13.1)(b) to payments to a partnership of which there is a non-resident limited partner, CRA stated:

We confirm your understanding that where a person resident in Canada pays an amount to a partnership that has ceased to be a Canadian partnership (within the meaning of that term in section 102 of the Act), paragraph 212(13.1)(b) of the Act deems the partnership, in respect of the payment, to be a non- resident person. Paragraphs 5 to 8 of Interpretation Bulletin IT-81R addresses this matter further.