(a)-(c)

Paragraph 212(1)(a) - Management fee

Cases

Peter Cundill & Associates Ltd. v. The Queen, 91 DTC 5085, [1991] 1 CTC 197 (FCTD), aff'd 91 DTC 5543 (FCA)

The taxpayer, which was the portfolio manager of the Cundill Value Fund and the Cundill Security Fund (the "Funds"), contracted with a Bermuda company ("PCAB") for the investment counselling and transaction skills of F. Peter Cundill, who beneficially owned all of PCAAB's shares, in order to provide those same services to the Funds. The taxpayer itself provided routine administrative services to the Funds. Cullen J. found that Mr. Cundill, who held 50% of the shares of the taxpayer, exercised "an influence and control over the affairs and future of the [taxpayer] that [was] disproportionate to his shareholding."

The substantial fees paid to PDAC were management fees for purposes of s. 212(1)(a), which were not excluded under the exception in s. 212(4)(a) for arm's length fees. In reaching this conclusion, Cullen J. stated (at p. 5088) that "generally speaking, a management or administration fee is an amount paid in respect of managerial services in connection with the direction or supervision of business activities," quoted approvingly a similar statement in IT-468, and then stated:

[I]t is undisputed that Per Cundill made all the investment decisions. In the context of the stated business of the plaintiff of investment counselling, investment decisions are obviously relevant to the future direction and operation of the plaintiff. [T]he investment decisions made by Peter Cundill are managemnt tasks... .

Administrative Policy

IT-468R "Management or Administration Fees Paid to Non-residents" (Archived) 29 December 1999

5. ...[T]he term "management or administration" generally includes the functions of planning, direction, control, co-ordination, systems or other functions at a managerial level. These functions may involve services for various departments of a business such as accounting, financial, legal, electronic data processing, employee relations, management consultation, labour negotiations, taxation, etc., relating to the management or administration. ...

6. ...Amounts paid for services actually performed, which may casually be described as management fees but in substance are for something else which can be identified, will not be subject to non-resident tax under paragraph 212(1)(a) nor will they be excluded from it by subsection 212(4).

Paragraph 212(1)(b) - Interest

Cases

The Queen v. Immobiliare Canada Ltd., 77 DTC 5332, [1977] CTC 481 (FCTD)

sale proceeds allocable to expectancy of interest were not interest receipt

A Canadian subsidiary ("Place Victoria") of a non-resident corporation ("SGI") decided with the consent of SGI to postpone the payment of interest on debentures held by SGI. The subsequent sale by SGI of those debentures to the defendant, which was a second Canadian subsidiary of SGI, did not trigger withholding tax on the payment of the purchase price by the defendant to SGI.

Addy, J. referred inter alia to the statement in Commisioners of Inland Revenue v. Oakley [1926] 1 K.B. 131, at 141 that:

[T]he seller does not receive "interest" from the buyer ... . He received the price of the expectancy of interest, and that is not the subject matter of the taxation.

He then applied that principle, expressed (at p. 5334) in terms that:

[W]here a person purchases a debt or obligation from a creditor on which there is accrued interest owing, the payment to the transferor of an amount required to purchase the right to the accrued interest does not constitute payment of interest to the transferor because the transferee is purchasing an expectancy to receive interest and not interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) sale of bond with accrued interest did not satisfy interest 178
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) elimination of Part XIII tax was a s. 246(1) benefit 91
Tax Topics - Income Tax Act - Section 76 105

See Also

Kinguk Trawl Inc. v. The Queen, 2002 DTC 1399 (TCC), rev'd 2003 DTC, 2003 FCA 85

rev'd on other grounds 2003 DTC, 2003 FCA 85

When the Minister assessed the taxpayer for failure to withhold on interest credited by it on amounts owing by it to a non-resident group which was resident in Denmark, the Minister for the purpose of computing the amount of Part XIII tax at a 15% rate at grossed-up the actual interest by a factor of 100/85. Margeson T.C.J. found that there was no basis for the Minister to do this. Irrespective whether the contractual arrangements with the non-resident required the taxpayer to indemnify the non-resident for withholding tax, no such indemnification occurred - by other payment or credit - during the years in question.

Wenger's Ltd. v. MNR, 92 DTC 2132, [1992] 2 CTC 2479 (TCC)

At the time of paying its Russian suppliers at a fixed interval of time after taking delivery of goods from them, the taxpayer paid them a percentage "surcharge" which was included in its financial statement as interest expense and described in contracts as "interest". Rip J. rejected the submission of counsel for the taxpayer that since the sale did not take place until the goods were paid for, no amount was due by the taxpayer to the vendor before the sale and found that the surcharges, in substance, constituted interest that was subject to withholding tax. Rip J. went on to note (at p. 2142) that it was not intended that any notional interest that accrued up to the time that a sale occurred will be subject to withholding tax:

"Once the purchase price is determined its components lose their identities ... Parliament did not contemplate that a bona fide purchase price be dissected to determine any interest component for the purposes of paragraph 212(1)(b). That provision does not look to notional interest."

Havlik Enterprises Ltd. v. MNR, 89 DTC 159, [1989] 1 CTC 2262 (TCC)

Sales contracts which the Canadian taxpayer ("Havlik") entered into with a Chinese supplier required Havlik to obtain irrevocable letters of credit in favour of the seller. When a particular letter of credit was due, the bank would draw the face amount of the letter of credit from Havlik's account and make payment to the supplier.

A 5% increase in the amounts of 27 letters of credit which the supplier required as compensation for a six-month extention in the due dates requested by Havlik was "interest", as it fitted the classic definition thereof as compensation for delay in payment.

Inland Revenue Commissioners v. Oswald, [1945] A.C. 360, 26 TC 435

A mortgage provided that interest in arrears might at the option of the mortgagee be capitalized. The capitalization of interest by the mortgagee pursuant to this right did not constitute "payment of any interest of money."

Holder v. C.I.R., [1932] A.C. 624 (HL)

The taxpayer and others guaranteed all amounts owing by a company to a bank, subject to an upper limit. When the company became insolvent, amounts paid by the taxpayer in respect of unpaid interest owing by the company did not qualify as "interest payable in the United Kingdom on an advance from a bank."

Lord Thankerton accepted the Crown's submission "that the appellants, as guarantors to the bank, did not pay interest on advances by the bank, but a sum due under the guarantee, the quality of the payment being determined by the guarantee and not directly or indirectly, by any person or associated group of persons; proceeds of asset sales in excess of specified annual limits are required to be utilized to make offers to repay the term loan; and excess cash flow generated in amounts that otherwise would exceed the 25% limit are required to be put into an account with a U.S. agent of the term lenders in the Finco name.

Administrative Policy

2020 Ruling 2020-0854741R3 - Subordinated Notes without Maturity

interest that could be cancelled in issuer's discretion was interest for Pt. XIII purposes
Note terms

In order to obtain “undated” capital that will be used by it inter alia to make distributions to its shareholders, Aco, a resident corporation, will issue Fixed Rate Resetting Perpetual Non-Cumulative Subordinated Notes (the “Notes”) in one or more private placements. They will:

  • be issued at no discount or only a shallow discount;
  • rank subordinate to all of ACo’s other indebtedness, except indebtedness which by its terms ranks equally or subordinate to the Notes;
  • accrue interest initially at the prevailing interest rate at their time of issuance and be payable in arrears on the “Interest Payment Dates,” with the interest rate thereafter being periodically reset on the “Interest Reset Dates;”
  • be subject to ACo’s right in its discretion, with prior notice to the holders, to cancel any interest that would otherwise be payable on any Interest Payment Date; however, in such event, Aco will be precluded from declaring dividends or repurchasing shares until interest payments are resumed.
  • be redeemable by Aco for their principal plus any accrued and unpaid (and uncancelled) interest
  • not trigger an Event of Default under the Notes if there is a failure to make a payment on the Notes when due (including any interest, whether as a result of cancellation or otherwise);
  • have no scheduled maturity or redemption date, so that ACo is not required to make any repayment of the principal except upon an Event of Default (principally, bankruptcy or insolvency).
Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

Interest paid by Aco on the Notes to a recipient (beneficially owning the Notes) dealing at arm’s length with Aco will not be subject to Part XIII tax.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) note interest that could be cancelled in issuer's discretion stated to be non-deductible 188

2019 Ruling 2018-0776381R3 - Part XIII tax under a reverse repo agreement

the negative repo spread on a reverse repo was not interest

ACo will enter into “reverse repo” transactions with BCo (a sister corporation) under which: at the outset, ACo will pay an amount equalling the Bonds’ then fair market value for their purchase; BCo will agree to repurchase the Bonds from ACo approximately three months later for a repurchase price equaling the original purchase price minus a negative spread of X basis points applied to the purchase price (the “negative repo spread”); and ACo will be obligated to pay an amount equal to and as compensation for coupons, if any, paid on the Bonds (e.g., coupon payments) during the term of the arrangement.

The negative repo spread reflects the negative interest rate that would be paid on short-term deposits at the time of the transaction consistently with arm’s length commercial practice. ACo enters into these transactions because it expects to earn a positive spread by entering into related transactions in which it sells or is short bonds.

Ruling:

The negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b) … .

In its summary, CRA stated its Reasons that:

The agreements are purchase and sale agreements to which subsection 260(2) does not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 260 - Subsection 260(2) reverse repo not recharacterized as securities loan 116

15 September 2020 IFA Roundtable Q. 2, 2020-0852741C6 - IFA 2020 - Q2 - WHT on mismatched swap payments

interest not imputed on mismatched cross-border swap payments
7 October 2020 APFF Roundtable, Q. 16, 2020-0867071C6 F is similar

A Canadian resident taxpayer (Canco) enters into a swap agreement with a non-arm’s length non-resident company (NRco). Payments under the swap agreement are made by Canco to NRco annually, whereas NRco makes its payments to Canco quarterly.

Q.60 at the 1984 CTF Roundtable suggests that where, as here, swap payments are not made contemporaneously, withholding tax may apply to a portion of the outbound payments that represents an interest element. Is this still CRA’s position?

CRA responded that in order for withholding tax to apply to the interest component of a swap payment, the legal character of the amount made by Canco to NRco must be recharacterized as interest for tax purposes. In light of the principle in Shell Canada (that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected), generally, withholding tax would not apply in this situation absent a finding of sham or the application of specific provision such as s. 245 or 247.

2018 Ruling 2017-0732001R3 - XXXXXXXXXX

“interest” that could be cancelled at cost of foregoing dividends was interest
2016-0649061R3 is quite similar
Proposed transactions

ACo will issue unsecured subordinated Notes in one or more public offerings for an amount equalling or approximating their principal amount. The interest thereon (the “Interest”) initially will be at a fixed interest rate that will be reset on each “Interest Reset Date” to a fixed annual rate for the applicable Interest Period plus a spread.

ACo may, in its sole discretion, with prior notice to the Noteholders, cancel any Interest that would otherwise be payable on any Interest Payment Date. However, ACo will agree that, if on any Interest Payment Date, it does not pay in full the Interest then due, ACo will not declare any dividends, or redeem or repurchase any of its shares (except pursuant to any retraction privilege or mandatory redemption provisions attaching to its preferred shares) until the month commencing immediately after ACo resumes Interest payments on the Notes.

The Notes have no scheduled maturity or redemption date. ACo is not required to make any repayment of the Principal Amount except in the event of an event of default.

On the occurrence of a specified event, the Notes will be converted into a number of common shares based on a formula-determined conversion ratio. There is no assurance that the conversion formula would result in the issuance of common shares having a fair market value at least equalling the principal amount of the Notes.

Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

The Interest amounts will not be subject to Part XIII tax under s. 212(1)(b), provided that i) the recipient of such amounts deals at arm’s length with ACo at the time of the payments, and ii) such Notes are beneficially owned by a person that deals at arm's length with ACo.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest which the issuer can elect not to pay was treated as non-deductible 186

2017 Ruling 2016-0649061R3 - Part XIII tax on payments on Notes

a perpetual note whose interest payments were optional had withholding-exempt interest
Proposed transactions

ACo will issue unsecured subordinated Notes in one or more public offerings at no more than a shallow discount. The interest thereon (the “Interest”) initially will be at a fixed interest rate that will be reset on each “Interest Reset Date” to a fixed annual rate for the applicable Interest Period (equal to LIBOR plus a spread).

ACo may redeem the Notes on the Interest Reset Date or any Interest payment date thereafter or on the occurrence of a specified event (presumably, the event of the Notes becoming subject to Pt. XIII tax). However:

The Notes have no scheduled maturity or redemption date. ACo is not required to make any repayment of the Principal Amount except in the event of an event of default.

ACo may, in its sole discretion, with prior notice to the Noteholders, cancel any Interest that would otherwise be payable on any Interest Payment Date. However, ACo will agree that, if on any Interest Payment Date, it does not pay in full the Interest then due, ACo will not declare any dividends, or redeem or repurchase any of its shares (except pursuant to any retraction privilege or mandatory redemption provisions attaching to its preferred shares) until the month commencing immediately after ACo resumes Interest payments on the Notes.

On the occurrence of a specified event, the Notes will be converted into a number of common shares based on a formula-determined conversion ratio. There is no assurance that the conversion formula would result in the issuance of common shares having a fair market value at least equalling the principal amount of the Notes.

Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

The Interest amounts will not be subject to Part XIII tax under s. 212(1)(b), provided that i) the recipient of such amounts deals at arm’s length with ACo at the time of the payments, and ii) such Notes are beneficially owned by a person that deals at arm's length with ACo.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) a perpetual note whose interest payments were optional had non-deductible interest 218

13 July 2018 Internal T.I. 2017-0713301I7 - Assumption of accrued interest

the covenant of the assuming debtor to pay accrued interest on a debt assumption was a payment in kind subject to Part XIII tax

The Partnership, a general partnership governed by the laws of a U.S. state that was a Canadian partnership under s. 102 as its partners were Canco and a wholly-owned Canadian sub of Canco, held all the shares of a U.S. LLC (the “Creditor Affiliate”), which had made an interest bearing loan to the Partnership (the “Loan”). The Loan was not recognized for U.S. tax purposes because Creditor Affiliate was a disregarded entity.

The Partnership subsequently transferred all of its assets, including the shares of the Creditor Affiliate, to a newly formed wholly-owned U.S. subsidiary of Partnership (the “Debtor Affiliate”), the consideration for which included the Debtor Affiliate assuming the Partnership’s liability to repay the Loan and to pay the accrued but unpaid interest thereon (the “Accrued Interest”) to the Creditor Affiliate. The Partnership was thereupon released of its obligations to the Creditor Affiliate by the Creditor Affiliate.

In response to a query as to whether Part XIII withholding tax applies to the Accrued Interest pursuant to paragraph 212(1)(b), the Directorate indicated its “preliminary conclusion” that there was a novation of the Partnership’s Loan obligation and then stated:

[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.

After noting that s. 212(13.1)(a) deemed the Partnership to be a person resident in Canada respecting then kind payment of the Accrued Interest, it concluded:

[P]ursuant to paragraph 212(1)(b), the Creditor Affiliate would have an obligation to pay a tax of 25% on the amount of the Accrued Interest that was paid or credited to it in kind by the Partnership at the time the obligation to pay the Accrued Interest was assumed by the Debtor Affiliate as a result of the novation.

Words and Phrases
novation
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(13.1) - Paragraph 212(13.1)(a) withholding when debt of Canadian partnership assumed by sub 171

2014 Ruling 2014-0539791R3 - Paragraph 212(1)(b)

creditors' approval of CCAA plan of compromise for the debtor trust did not cause them to not deal at arm's length with trust

underline;">: Background. The (Canadian-resident) Trust was formed to provide credit protection to the (non-resident unrelated) Bank by entering into credit-default swaps ("CDS") with the Bank, secured by pledges of collateral. The acquisition by the Trust of the collateral was funded by issuing (apparently unsecured) short-term interest-bearing Notes, and were being regularly rolled over. In XX (presumably, 2008), the Trust ceased to be able to roll over the Notes.

Settlement

After protracted litigation between the Trust and the Bank and "arm's length negotiations," they reached a Settlement Agreement, which resulted in the Noteholders (which now included the "Non-Resident Holders," comprising the Bank and certain of its subsidiaries, and the resident Fund) receiving repayment in full of the principal owing. This repayment followed on the Bank making specified payments to the Trust under the CDS. The implementation of the settlement occurred pursuant to a CCAA plan of compromise and arrangement, which was voted on by the Noteholders. The Plan provided that the Notes would bear interest at BA-based rates and that "the recourse of the Noteholders to receive the Interest is limited to the assets of the Trust that remain after the repayment of the principal amount owing on the Notes [and certain costs].".

Proposed transaction

Each Noteholder will receive a pro rata partial repayment of the interest amount owing to it. The Trust assets available are insufficient to repay such interest in full.

Rulings

. A. The payments of interest by the Trust to the Non-Resident Holders will not be "participating debt interest." Reasons (per summary):

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.

"B. The entering by the Non-Resident Holders into the Settlement Agreement and their voting in favour of the Plan, in and of themselves, will not result in any of the Non-Resident Holders being considered to not deal at arm's length…with either the Trust or the Trustee."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest interest paid on limited recourse debt to the extent of available debtor assets was not participating debt interest 248
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) creditors' approval of CCAA plan of compromise for the debtor trust did not cause them to not deal at arm's length with trust 204

16 April 2014 External T.I. 2014-0525071E5 - Part XIII tax on interest payments

note issued by nephewco to uncles

Given that a nephew and his uncles were not related, interest on a notes issued by the nephew's corporation to acquire another corporation from his uncles would not be subject to Part XIII tax provided that it dealt at arm's length with them as a factual matter.

21 July 2009 Internal T.I. 2009-0322591I7 F - Déduction des intérêts

issuance of replacement promissory note for amount of previous principal plus capitalized interest was not a crediting of such interest

The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. After finding that the issuance of the second note did not constitute a payment by novation, CRA went on to find that there also was not resulting payment or crediting of the interest. In this regard, it quoted from the Québec Cartier decision, and stated:

[T]he Taxpayer did not pay the increased and annually capitalized interest and did not credit the Vendor with such interest when the note payable on XXXXXXXXXX was issued on XXXXXXXXXX.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition replacement of note and capitalized interest by new note with increased amount did not constitute payment by novation of the old debt 193
Tax Topics - General Concepts - Payment & Receipt replacement of note with capitalized note with note for full amount did not constitute payment by novation 119

23 January 2008 External T.I. 2007-0241391E5 - Withholding tax on payments made by a guarantor

interest received from guarantor

Would "Part XIII withholding tax… apply to amounts of interest and/or principal payments made by a Canadian resident corporate guarantor to a non-resident lender where the original corporate borrower was a non-resident?" CRA responded:

Part XIII withholding tax would apply to the interest portion of the payment by the resident guarantor if the provisions of paragraph 212(1)(b) are met, i.e., if the interest is not fully exempt interest, and is paid or payable to a person with whom the payer is not dealing at arm's length, or is participating debt interest. Furthermore…where interest on the original indebtedness would have met the provisions of paragraph 212(1)(b), the portion of the payment by a resident corporate guarantor retaining the character of interest would meet the provisions of paragraph 212(1)(b) as well.

The corollary is that where interest on the original indebtedness would not have met the provisions of paragraph 212(1)(b), such as if the interest was fully exempt interest, or was not fully exempt interest but was paid to an arm's length recipient.. the portion of the payment by a resident corporate guarantor retaining the character of interest would not meet the provisions of paragraph 212(1)(b) either and therefore Part XIII would not apply.

8 March 2007 Internal T.I. 2006-0214291I7 - Part XIII withholding tax

applied in 2017-0720181I7

"Where a loan agreement provides for a gross-up of the interest payments, our position is that paragraph 18(1)(t) of the Act does not apply to the gross-up amount and that the gross-up amount may be considered as additional interest for the purposes of paragraph 212(1)(b) ... ."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 214 - Subsection 214(3) - Paragraph 214(3)(a) ss. 56(2) and 214(3) inapplicable to a benefit conferred on a non-shareholder non-resident 119

2006 Ruling 2006-0208001R3 - Post-amble to paragraph 212(1)(b)

participation based on mutual funds

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest participation based on mutual funds unrelated to issuer 60

2005 Ruling 2005-0161521R3 - Postamble of 212(1)(b)

variable interest tracked creditworthiness

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.

7 May 2004 IFA Roundtable Q. 1, 2004-0072131C6 - IFA Round Table 2004 Q.1 - 212(13.1)(a)

partnership borrower was transparent

In the context of a "tower" structure, a partnership of which two taxable Canadian corporations are the partners borrows money from a U.S. financial institution in order to acquire an interest in a U.S. limited liability company. The Directorate indicated that in a recent tax ruling request, the CRA had concluded in light of the foreign law applicable to such a partnership, the provisions of the partnership agreement and the terms and conditions of the loan agreement between the partnership and the U.S. lender that the partners of the partnership were considered to be the payers of the interest on the loan, with the result that such interest was not exempt from withholding tax as the loan did not qualify under s. 212(1)(b)(vii).

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 11 257
Tax Topics - Income Tax Act - Section 212 - Subsection 212(13.1) - Paragraph 212(13.1)(a) where s. 212(13.1)(a) does not apply, it may be possible to consider a Canadian partner to be an interest payer 221

19 February 2003 Internal T.I. 2002-0125767 - STRONG CURRENCY BORROWINGS

Periodic swap payments made under a "plain vanilla swap" were not subject to Part XIII tax.

8 January 2003 External T.I. 2002-0173135 - INTEREST POSTAMBLE

"A loan agreement that contains a provision for increased payments to the lender that are based on the ratio of certain debt to EBITDA ... of the borrower may fall within the ambit of the broad wording in the postamble ... ."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest participating interest exclusion might apply where interest rate increased when high debt to EBITDA ratio 141

9 October 2001 External T.I. 2001-0096655 - Interest Exemption From Part XIII

stock index link

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."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Subparagraph 212(1)(b)(vii) 42
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest acceptable to link to stock index that is not selected based on inclusion of the issuer or corporations with siimilar business 102

13 July 2001 Internal T.I. 2000-0051017 - STRONG CURRENCY BORROWINGS

swap payments not interest

Recharacterizing periodic swap payments as interest could not be supported given that the relationship between the parties was not that of lender-borrower.

16 November 2000 External T.I. 2000-0050975 - WITHHOLDING TAX ON SWAP PAYMENTS

A payment made pursuant to "the risk mitigation provision" in a swap agreement would not be considered to be on account, in lieu of payment of, or in satisfaction of interest.

22 November 2000 External T.I. 2000-0046375 - WITHHOLDING TAX ON INDEX LINKED DEBT

Stock index link

The Agency would not generally consider the return computed by reference to a foreign stock index to be "computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion" 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. "Also, the Agency would want to be satisfied that the debt obligation is not used by a non-resident of Canada as a substitute for direct investment in the underlying securities in an index where dividends or gains on those securities will be subject to tax in Canada if held directly by that non-resident."

Other locations for this summary
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest exclusion not engaged where debt return is linked to foreign stock index

16 May 2000 External T.I. 2000-0011015 - WITHHOLDING TAX ON INDEX-LINKED INTEREST

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest link to FX fluctuation acceptable 123

24 November 1995 External T.I. 9508605 - WITHHOLDING TAX ON PRESCRIBED DEBT OBLIGATIONS

Deemed interest on prescribed debt obligations is subject to withholding tax under s. 212(1)(b).

5 July 1994 Internal T.I. 9334557 F - Part XIII - Pooled Common Trust Funds

Canadian dividend or interest income paid to a pooled common trust fund in the U.S. will be treated for Part XIII purposes as being paid to a trust resident in the U.S.

93 C.R. - Q. 31

The amount of withholding tax applicable to a $1,000 interest payment that then is increased in amount pursuant to a standard gross-up clause will be determined in accordance with the formula (15/(100 - 15)) x $1,000, assuming that 15% is the rate of withholding tax.

IC-77-16R4 "Non-Resident Income Tax", 11 May 1992, para. 21

guarantor payment

A payment by a guarantor resident in Canada to a non-resident on account of or in lieu of payment of, or in satisfaction of interest that was on an obligation of a person in default, retains the character of interest in the hands of the non-resident.

28 March 1991 T.I. (Tax Window, No. 1, p. 19, ¶1173)

The Financial Industries Division has recommended that the assessing policy in IT-233R be applied for all purposes of the Act including Part XIII.

27 March 1990 T.I. AC74543 [guaranteed interest received as interest]

guaranteed interest received as interest

Liability for withholding under s. 212(1)(b) is determined from the perspective of the non-resident payee and not from that of the resident payor. Where a Canadian corporation makes payment by virtue of its guarantee of the debt of its non-resident parent, then where the debt has not been renegotiated and rescheduled the portion of the indemnity payment which is in respect of accrued interest that is due will be subject to Part XIII tax as the non-resident payee receives those payments of interest. Where the loans are renegotiated and rescheduled and the Canadian subsidiary provides advances to the borrower which must be used to extinguish the outstanding accrued interest, the advance will not result in the actual payment by the borrower [sic] in satisfaction of interest, but nonetheless will be subject to Part XIII tax on the basis of the "in lieu of or in satisfaction of" wording.

84 C.R. - Q. 60

No Part XIII tax is exigible on payments made by Canco on an interest coupon swap provided that the payments by Canco are made at the same time as the payments received by it.

Articles

Raj Juneja, "Taxation of equity derivatives", 2015 CTF Annual Conference paper

Implicit interest element where mismatched equity swap payments (p. 17:19-20)

[I]f the periodic payments under a TRS are not made by both parties contemporaneously, the CRA has stated that it will consider the payments made later to contain an interest element that could be subject to withholding tax [f.n. 23...2000-0051017....]. Although these comments were made in the context of interest rate swaps, the principles may potentially be extended to equity derivatives where there is a mismatch in the timing of payments. Any such interest will be subject to withholding tax under paragraph 212(1)(b) only if it is paid to a person with whom the payer does not deal at arm's length or if the interest constitutes "participating debt interest"… .

Wilson, "Selected Canadian Withholding Tax Issues", 1996 Cross-Border Taxation Issues and Developments, International Fiscal Association, p. 233

Includes an extended discussion of the Canadian withholding tax treatment of guaranteed payments.

Subparagraph 212(1)(b)(i)

Administrative Policy

3 December 1992 T.I. 921655 (C.T.O. "Factoring Accounts Receivable Whether Sale or Loan"; Tax Window, No. 26, p. 5, ¶2315)

non-arm’s length terms on sale of trade receivables to sub would indicate that it in fact was a non-arm’s length loan

Canco "sells" its “eligible” trade accounts receivable to its U.S. wholly-owned subsidiary (USco) for their outstanding value, less an arm’s length factoring fee. USco has no recourse, directly or indirectly, against Canco in respect of the receivables, except that "adjustments" to the face amount of the receivables occur if they subsequently are determined not to be "Eligible receivables" as defined in the transfer agreement. Would Revenue Canada consider that the receivables have been sold (so that the discount earned by USco on the receivables would not be interest subject to withholding), or would there be considered to be a loan by USco to Canco secured by a partial assignment of the accounts receivable, with the discount being considered to be interest payable under such loan?

Revenue Canada responded:

A number of facts may compel the conclusion that the arrangements between the parties is a "loan" as opposed to a "sale", for example, where the amount of the discount is not at the normal rate or terms for discounting of similar types of accounts receivable in similar types of businesses, or for similar types of risks, it may be seen as a loan (or even as a service) of the subsidiary for the benefit of the parent corporation. … Similarity the fact that the Canadian company continues to collect the accounts receivable without notifying the various debtors would tend to indicate that a transfer of title has not actually taken place. Another factor which would tend to point to a transaction being a "loan" as opposed to a "sale" would be the amount of the "fees" earned by the Canadian Company for its services of the collecting the accounts receivable.

The deductibility of the discount to the Canadian Taxpayer, would be subject to the considerations listed in IT Bulletin 188R and must meet the provisions of section 67 and section 69 of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) 53

Articles

John Tobin, "Infrastructure and P3 Projects", 2017 Conference Report (Canadian Tax Foundation), 10:1-31

S. 212(13.1)(c) precludes transparent treatment of controlling NR partnership

Subsection 18(7) does not apply for withholding tax purposes. If a partnership controls Projectco, it will be considered by the CRA not to deal at arm’s length with Projectco because the partnership is treated as a person for domestic withholding tax purposes under subsection 212(13.1). For treaty purposes, however, the CRA appears to treat the partnership as a conduit, and the treaty protection available to each partner will be applied subject to appropriate documentation proving eligibility. If one or more partners are not eligible for the same treaty relief, as a practical matter a blended withholding rate is applied. [citing 2004-0072381C6]

Subparagraph 212(1)(b)(ii)

See Also

Munich Reinsurance Co. (Canada Branch) v. The Queen, 2000 DTC 2009 (TCC)

Refund interest earned by the taxpayer as a result of overpayments of tax would not have qualified for exemption under s. 212(1)(b)(ii)(c). Bowman TCJ. stated (at p. 2014):

"'Similar obligation' is ejusdem generis with the types of negotiable and transferable securities and commercial instruments issued by the government."

Moran v. Pappas (1997), 34 OR (3d) 251 (Ont. Ct. (G.D.))

A corporation that was responsible to the Ontario Minister of Agriculture and Food fell within the definition of a Crown agency in the Crown Agency Act (Ontario), as a company controlled or operated by Her Majesty. As such, it held title to land as agent for the Crown.

R. v. Eldorado Nuclear Ltd.; R. v. Uranium Canada Ltd. (1983), 4 DLR (4th) 193, [1983] 2 S.C.R. 551

Although Eldorado would not have been a Crown agent under the common law test of whether the alleged agent can assert independence by reason of the terms of appointment and nature of the office, Eldorado was deemed to be a Crown agent by virtue of a statutory provision that provided that it "is for all purposes an agent of Her Majesty and its powers may be exercised only as an agent of Her Majesty". Accordingly, Eldorado benefitted from Crown immunity against a prosecution under the Combines Investigation Act to the extent that the impugned acts were designed to effect Crown purposes (as opposed to, say, acts that were committed in the course of fulfilling Crown purposes but which in no way were undertaken in order to effect Crown purposes). Since this test was satisfied, Eldorado was immune from such prosecution.

Dickson J. stated (at p. 213):

"The draftsman of the governing statutes of Uranium Canada and Eldorado may well have been thinking of immunity from taxing statutes rather than criminal statutes, but the result is that there is immunity from both as long as the corporations are acting within their respective authorized purposes."

Sydney Steel Corp v. A.L.E. & C. Ltd. (1983), 148 DLR (3d) 348 (N.S. C.A.)

Sydney Steel Corporation was not an agent of the Crown given that in controlling the day-to-day operations of its plant it was operating independently, and notwithstanding that its directors and officers were appointed by the Crown.

Re Canada Dairies Corp. Ltd. (1981), 131 DLR (3D) 605 (Ont. S.C.)

The Ontario Milk Marketing Board and the Milk Commission of Ontario were part of a direct legislative procedure to control the marketing of milk and, as such, were Crown agencies. Accordingly, they were entitled to rank as preferred creditors for purposes of the Bankruptcy Act.

Re McGruer & Clark Ltd (1976), 13 OR (2d) 385 (S.C.O.)

The Ontario Development Corporation was a Crown agency within the meaning of s. 1 of the Crown Agency Act (Ontario) given that: the Crown owned all its shares; the Crown appointed all its directors, the permanent staff of the corporation were members of the public service; and the corporation was subject to the control of the Crown in the most fundamental aspects of its financial structure and operation. Accordingly, it was not subject to the Planning Act (Ontario).

R. v. Ontario Relations Board, Ex. P. Ontario Housing Corp. (1971), 19 DLR (3d) 47 (Ont HC)

The statutory restrictions and controls of the executive branch of the Ontario government over the Ontario Housing Corporation, which was a non-share corporation, made it an agent of the Crown at common law and also a Crown agency within the meaning of the Crown Agency Act. Accordingly, it was not affected by the Labour Relations Act (Ontario).

Administrative Policy

29 August 1995 External T.I. 9506325 - SIMILAR OBLIGATIONS AND 212(1)(B)(II)(C)(II)

Guaranteed investment certificates and term deposits would qualify as "similar obligations" for purposes of s. 212(1)(b)(ii)(C)(II), in that they would contain an explicit promise by the issuer to reimburse an amount on a given day.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(c.1) similar obligation must be in writing, containing an explicit promise by the issuer to reimburse an amount on a given day, and be of the same nature as the listed obligations 169

91 C.R. - Q.40

Stripped Government of Canada bond interest coupons qualify for the exemption.

14 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 30, ¶1090)

Guaranteed investment certificates may constitute "similar obligations".

IT-155R3 "Exemption from Non-resident Tax on Interest Payable on Certain Bonds, Debentures, Notes, Hypothecs or Similar Obligations"

General discussion of s. 212(1)(b)(ii)(C) exemption for governmental obligations.

Clause 212(1)(b)(i)(C)

Administrative Policy

16 November 2000 External T.I. 2000-0050975 - WITHHOLDING TAX ON SWAP PAYMENTS

Where payments made by a provincial government pursuant to a swap agreement were found to contain an element of interest, the Agency would generally consider the obligation to make the payment as similar to a bond, debenture, note or mortgage of a government of the province.

Clause 212(1)(b)(iii)(C)

Cases

Munich Reinsurance Co. v. The Queen, 96 DTC 6185, [1996] 2 CTC 5 (FCTD)

Interest earned by the taxpayer (a German corporation) on income tax instalments which it had overpaid did not qualify for exemption under s. 212(1)(b)(ii)(C) because "the obligation of the government to pay interest on an overpayment of income tax is not a 'similar obligation' since it is neither an instrument nor a contract, but a statutory obligation".

Clause 212(1)(b)(iii)(D)

Administrative Policy

2005 Ruling 2005-0139661R3 - Withholding Index-Linked Notes

A foreign-denominated index-linked note issued by a Canadian bank which did not provide for the return of the principal amount or any interest or other amount on the note prior to the maturity date, and with the return on the note being deducted by the bank for financial statement and tax purposes on the maturity date, would be exempt from withholding tax by virtue of s. 212(1)(b)(iii)(D).

87 C.R. - Q.1

An "amount deposited" is any unsecured debt of a prescribed financial institution which is reported to the applicable government authority as a deposit. [C.R.: 204(e)(i)]

IT-360R2 "Interest Payable in a Foreign Currency"

General discussion of the exemption in s. 212(1)(b)(iii)(D).

Articles

Wilkie, "Structuring International Debt Issues: A Canadian Perspective", Canadian Tax Journal, January/February 1987, p. 1

General discussion.

Clause 212(1)(b)(iii)(E)

Cases

Kinguk Trawl Inc. v. Canada, 2003 DTC 5168, 2003 FCA 85

catch sold outside Canada through NR agent

The taxpayer (which was engaged in fishing for shrimp in Canadian waters) was found, based on the wording of an agreement between it and a non-resident group ("Uhrenholt") to have sold the shrimp harvested by it overseas through Uhrenholt as its agent rather than immediately upon landing, with the result that a portion of the interest credited by the taxpayer to Uhrenholt qualified for exemption under s. 212(1)(b)(iii)(E), as such interest related to business carried on by the taxpayer outside Canada (namely "the whole of the sales function, from the marketing of the catch to the making of the contracts"). Selling the catch was not merely an ancillary activity but an essential component of the taxpayer's business.

Words and Phrases
agent

Cutlers Guild Ltd. v. The Queen, 81 DTC 5093, [1981] CTC 115 (FCTD)

The obtaining of letters of credit from a New York financial institution by the taxpayer's president was found to be ancillary to the taxpayer's business of selling Oriental silverware to major Canadian department stores and distributing those wares from its home office outside Toronto. The obligations under the letters of credit accordingly were entered into in the course of carrying on a business in Canada, and the S.212(1)(b)(iii)(E) exemption was not available.

See Also

Kinguk Trawl Inc. v. The Queen, 2003 DTC 1524, 2003 TCC 842

The taxpayer, which fished in the Atlantic Ocean and sold fish through an agent in Denmark, was entitled for purposes of s. 212(1)(b)(iii)(E) to treat expenses for supplies and services for its vessels while in foreign ports as relating to the carrying on of a business in a country other than Canada.

Subparagraph 212(1)(b)(vii)

Cases

General Electric Capital Equipment Finance Inc. v. Canada, 2002 DTC 6734, 2001 FCA 392

material changes produced new obligation

Amendments to the terms of promissory notes that decreased the principal owing, increased the interest rate, changed the maturity date and changed the identity of the payee were found to give rise to new obligations, with the result that their maturity date occurred within five years of the date of (new) issue. After stating (at para. 10) that "I ... do not think that a novation is required before there can be a new obligation" and (at para. 12) "because novation is an issue of fact, whether or not a new obligation has been created is also, by analogy, a question of fact," and noting (at para. 13) that in Wiebe "this Court held that fundamental changes to a stock option agreement which substantially affected the basic elements of the agreement were inconsistent with the continued existence of that agreement," Sexton J.A. stated (at para. 16) that:

"When it can be said that substantial changes have been made to the fundamental terms of an obligation which materially alter the terms of that obligation, then a new obligation is created ... ."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition changes to 3 of the 4 fundamental attributes of debt produced new debt 311

See Also

Lixo Investments Ltd. v. R., 97 DTC 1030, [1997] 2 CTC 2772 (TCC)

The corporate taxpayer was found to be dealing in arm's length with a non-resident corporation ("Slupy") which had provided most of the taxpayer's debt and equity capital based on a finding that the family that owned most of the voting common shares of the taxpayer (having a relatively nominal capital) dealt at arm's length with the persons owning a second non-resident corporation that had de facto control of Slupy. The fact that the terms of the equity portion of the investment of Slupy in the taxpayer (non-cumulative and non-participating preferred shares) were not those that would have been normally agreed to by persons dealing at arm's length only reflected the fact that the non-resident group had made a bad investment. Accordingly, interest paid by the taxpayer to Slupy on advances was exempt under s. 212(1)(b)(vii).

Carma Developers Ltd. v. The Queen, 96 DTC 1798, [1996] 3 CTC 2029 (TCC), briefly aff'd 96 DTC 6569 (FCA)

Under a plan that was approved by the requisite majority of creditors in accordance with the companies' Creditors Arrangement Act, various classes of unsecured or undersecured creditors of the taxpayer ("CDL") transferred indebtedness of the taxpayer in exchange for shares of the taxpayer's parent corporation ("CL").

Bowman TCJ. found that the debts were not extinguished by novation notwithstanding that the creditors acknowledged to CDL that no further consideration was owed to them in respect of the assigned indebtedness, and stated (at p. 1802):

"A novation involves the creation of a new contractual relationship, generally where a debtor is released from its obligation to an obligee with the consent of the obligee and the assumption of the obligation by a third party so that a new obligation arises between the obligee and the third party. Here there is no new contract. The same debt of CDL continues to exist."

Administrative Policy

2007 Ruling 2006-0218931R3 - Material Adverse Clause and Withholding Exemption

Favourable ruling with respect to a material adverse change clause whose wording was redacted.

2006 Ruling 2006-0211781R3 - Withholding Tax Exemption

loan to Finco sub of GP with on-loan to LP

Non-resident term lenders make a loan to a wholly-owned subsidiary ("Finco") of the general partner of a Canadian limited partnership that is a subsidiary partnership (through an intermediate unit trust) of an income fund. Finco on-lends on similar terms to the limited partnership. Events of default include a delisting of units of the income fund, and the partnership ceasing to be a direct or indirect subsidiary of the income fund. Ruling that interest paid on the loan to Finco by arm's length lenders is exempt from withholding.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.3) on-loan by special purpose sub in ordinary course 62

2006 Ruling 2006-0195501R3 - Withholding Tax Exemption

A wholly-owned taxable Canadian subsidiary ("Finco") of another taxable Canadian corporation ("ACo") on-lends money borrowed from a non-resident of Canada to a second-tier wholly owned partnership of ACo ("LP #2") with the loan to Finco being secured by a mortgage granted by LP #2, a limited guarantee from ACo and a pledge by ACo of its units in a holding partnership for LP #1. Events of default under the loan to Finco include the cancellation of an operating licence for the business of LP #2, and specified changes in the direct or indirect ownership of Finco.

Ruling that the exemption is available.

2006 Ruling 2006-0191881R3 - Witholding Tax Exemption

Favourable ruling with respect to a cross-border term loan made to an indirect subsidiary ("Finco") of an income fund, with the proceeds on-lent to an indirect general partnership subsidiary of the income fund where a "change of control" (giving a rise to an event of default) is defined to mean any event which results in equity interests representing more than 50% of the voting or economic interest in the Fund being held, directly or indirectly, by any person or associated group of persons; proceeds of asset sales in excess of specified annual limits are required to be utilized to make offers to repay the term loan; and excess cash flow generated in amounts that otherwise would exceed the 25% limit are required to be put into an account with a U.S. agent of the term lenders in the Finco name.

26 July 2005 External T.I. 2005-0134621E5 - Withholding Exemption

In indicating that where a non-resident payer is a partnership (made up of corporations) and is deemed to be a resident of Canada, the exemption in s. 212(1)(b)(vii) is available, CRA stated:

"Where the provisions of paragraph 212(13)(f) of the Act or subsection 212(13.2) of the Act are applicable in respect of a particular payment such that a non-resident payer of interest is deemed to be a resident of Canada and the payer is a corporation or a partnership, where all of its members are non-resident corporations or another partnership where all of its members are non-resident corporations to which 212(13)(f) of the Act would apply, interest payable in these circumstances will represent 'interest payable by a corporation resident in Canada' for the purposes of subparagraph 212(1)(b)(vii) ... ."

2005 Ruling 2005-0161521R3 - Postamble of 212(1)(b)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) variable interest tracked creditworthiness 99
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest variable interest tracked creditworthiness, not profitability 99

2005 Ruling 2005-0124081R3 - Withholding Tax Exemption

Permissible events of default in a project financing included events that involved parties not subject to the loan agreement, e.g., parent entities merging or consolidating without lender approval, direct or indirect interests in the Borrower being sold to certain restricted persons without prior consent and various defaults by project contractors or material adverse events in respect of them. Also, an expansive illegality clause permitted; and Borrower is required to offer to repay the loan on various specified events including on receipt of insurance or expropriation proceeds or upon receiving a notice of illegality from the lenders' agent.

2005 Ruling 2005-0133561R3 - withholding tax exemption

A Canadian subsidiary ("Finco") of the general partner of a Canadian limited partnership issues U.S. dollar secured notes in the U.S. market and on-lends the funds to the partnership. Ruling that the interest on the loans is exempt.

2005 Ruling 2005-0119091R3 - Withholding tax; interest

Favourable ruling with respect to a subsidiary trust of an income fund transferring a business division to a partnership, which borrowed from a newly-incorporated subsidiary of the trust the proceeds of a loan intended to qualify under s. 212(1)(b)(vii).

2004 Ruling 2004-0094741R3 - Withholding Exemption -Minimum EBITDA

A Canadian corporation ("Holdco") finances an acquisition with notes ("Holdco Notes") or (if it is unable to successfully market the Holdco Notes) through a borrowing (the "Alternate Financing Facility"). Under both indebtedness, if a minimum EBITA is not achieved, and such failure is not cured by a contribution to Holdco and its direct and indirect subsidiaries (other than unrestricted subsidiaries), Holdco will be required to make an offer to repurchase the Holdco Notes (or to repay the debt under the Alternative Financing Facility). Failure to do so constitutes an event of default. Such terms would not cause the exemption in s. 212(1)(b)(vii) not to be available.

Draft GST/HST Policy Statement "Agreements and Novation"

Example A: No novation where a corporation issues a promissory note to a bank with respect to an already-existing loan of $100 million, the promissory note extends the term of the loan by one year, there is a higher rate of interest, and another party is added as guarantor.

2004 Ruling 2004-0094751R3 - Withholding tax; interest

GAAR did not apply where a Canadian securitization trust, in order to borrow at favourable rates provided by an arm's length foreign lender, entered into a back-to-back financing arrangement under which the lender lent to a newly-incorporated Alberta corporation owned by a trust with a charitable beneficiary, and that corporation lent, on similar terms, to the trust.

2004 Ruling 2004-0093591R3 - Withholding - GP corporation on loans to LP

In order to access the more favourable terms available in the U.S. markets, the general partner of a publicly-traded limited partnership borrows on a private placement basis from arm's length U.S. institutional lenders and on-lends on similar terms (but with a mark-up on the interest rate) to the partnership. A ruling that s. 245(2) will not apply given that there is a business purpose, and the structure has been in existence for some time.

2004 Ruling 2004-0092731R3 - Withholding Tax exemption on-loan to a lp

A favourable ruling re loan by U.S. lenders to the corporate general partner of a Canadian partnership which on-lends, on similar terms, to the partnership, based on the structure providing better security for the lenders. An event of default includes net proceeds from asset sales not being reinvested in the business within 360 days.

Income Tax Technical News, No. 30, 21 May 2004

The GE Capital case is consistent with the views of the Agency that at common law a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms as to substitute a new obligation in its place which is inconsistent with it to an extent that goes to the very root of it; and the Agency has ruled that there was no new obligation coming into existence when the terms of an existing obligation were changed to defer the payment of interest payments until maturity, to amend the security interests of the debt holders, and to change the conversion ratio.

2003 Ruling 2003-03924

The corporate general partner of a Canadian limited partnership operating a business in Canada borrows on an unsecured basis under a loan with a term of over twenty years from U.S. institutional lenders, and on-lends the funds on similar terms, but at a higher interest rate, to the limited partnership. Given that the interest rate on this borrowing is lower than the rate on comparable Canadian financings (such financings were even available, s. 245(2) would not be applied to alter the tax consequences of the borrowing by the general partner, including its exemption nature under s. 212(1)(b)(vii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 101

17 June 2003 External T.I. 2002-0178455 - NEW DEBT OBLIGATIONS; NOVATION

Also released under document number 2002-01784550.

"Whether a change in the terms of a debt obligation results in a 'new' obligation for the purposes of subparagraph 212(1)(b)(vii) of the Act and/or for the purposes of other provisions of the Act is a question of fact to be determined on the basis of the law of contract in the relevant jurisdiction. In particular, [CCRA] accepts the ratio of the Federal Court of Appeal in General Electric Capital: that the term 'novation' is not included in subparagraph 212(1)(b)(vii) of the Act and that a novation is not required for there to be a new obligation for the purpose of subsection 212(1) of the Act. ... Where there has been a novation, rescission, or accord in satisfaction at law, it would usually mean that one contract/obligation has been replaced by a new contract/obligation".

2002 Ruling 2002-0167273 - WITHHOLDING EXCEPTION ASSET SALE

A favourable ruling given where the issuer was required to make an offer to noteholders out of a specified portion of net after-tax proceeds of asset sales in excess of a stipulated amount to repurchase their notes out of such proceeds for their face amount plus accrued interest and a make-whole amount; and where the issuer was required, if it did not receive majority credit approval for the reinvestment of insurance and expropriation proceeds, to use such proceeds (to the extent not allocated to other facilities) to repurchase, in a specified proportion, the notes.

3 July 2002 External T.I. 2002-0122185 - TWO TIERED PARTNERSHIP

An otherwise eligible borrowing will qualify where the borrower is a partnership "all of the members of which:

3 July 2002 External T.I. 2001-0084615 - ACCEPTABLE EVENTS OF DEFAULT

When asked whether it would be an acceptable event of default respecting a note borrowing by a widely held corporation to refer to the direct or indirect acquisition of more than 35% of the voting power of the borrower's stock, the Directorate indicated that this was a question of fact which should be addressed in a rulings context but further stated that the words in s. 212(1)(b)(vii)(C) "may include many situations where the lender has included in the terms of the loan or agreement an event that is beyond their [sic] control and which in their view would pose a risk to their loan".

2000 Ruling 2000-0029483 - Interest paid to non-residents

The controlling shareholder of the corporate borrower was a mutual fund trust which received most relevant services pursuant to management and services agreements with a company from whom the trust initially had purchased its assets. Termination of those agreements would be an acceptable event of default. Also the failure of the borrower to make an offer to repurchase the issued notes in the event of its failure to reinvest asset sale proceeds within a specified time was an acceptable event of default.

9 October 2001 External T.I. 2001-0096655 - Interest Exemption From Part XIII

An extension of the maturity date of a debt obligation occurring in accordance with its original terms would generally not result in CCRA viewing there to have been a reissue of a new loan for purposes of s. 212(1)(b)(vii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) stock index link 102
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest acceptable to link to stock index that is not selected based on inclusion of the issuer or corporations with siimilar business 102

17 September 2001 External T.I. 2001-0087185 - EVENT OF FAILURE OR DEFAULT

The presence of the following event of default would not be acceptable: "The occurrence or threatened occurrence of an event which, in the opinion of the lender, has a material adverse effect on the financial situation of the borrower." The phrase "in the opinion of the lender" would not be acceptable because the resulting discretion would give the lender control as to when a debt could be recalled. In addition, even without this phrase, the clause would not be acceptable because "the words are ambiguous and could give the lender virtually an open-ended opportunity to recall the obligation for reasons which they [sic] would consider material ... ."

4 December 2001 External T.I. 2001-0111455 - WITHHOLDING TAX EXEMPTION INTEREST

Clarification that the conversion right referred to in #E9721405 and #E9824125 referred to situations where conversion was at the option of the holder rather than the issuer.

2001 Ruling 2000-0060623 - Amendments to Notes - Disposition?

Amendments to notes to extend the maturity date, change the amortization schedule for principal and change the interest rate were ruled not to result in the issuance of new obligations for purposes of s. 212(1)((b)(vii) on the basis of a representation that such changes did not result in a novation or rescission of the notes and given that the amendments were approved by extraordinary resolution as contemplated in the existing trust indenture.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition no disposition where no novation or rescission 110

10 January 2001 External T.I. 2000-0007835 - EXEMP FROM WITHHOLDING TAX ON INTEREST

The loan agreement will not qualify if it requires the proceeds of sale of assets of the borrower to be applied against the loan if such sale is not listed as an event of default. "If, however, upon the sale of the asset the borrower is required to make an offer to repay the loan and the failure to make the offer is defined as a default under the terms of the loan, the asset sale would be considered a 'triggering event' that would not cause the exemption in 212(1)(b)(vii) to be denied."

6 March 2000 External T.I. 1999-001355

The Directorate will consider in the context of a rulings application whether default by any member of a corporate group even if not a party to the credit agreement may result in acceleration of the obligations under the credit agreement. Rulings have been issued respecting defaults by sister or subsidiary corporations giving rise to a cross-default.

2000 Ruling 2000-0035043 - XXXXXXXXXX

A Canadian subsidiary of a foreign parent issues units each consisting of a debt obligation, a guarantee of the parent and a put to the parent (called a warrant) for parent shares. The exercise price of the warrant is set at the time of issue. S.212(1)(b)(vii) applies to interest on the debt obligation (and no part of the consideration for the unit need be allocated to the warrant).

15 June 1999 External T.I. 9903035 - WITHHOLDING TAX

partnership entity for arm's length purposes

Where a partnership has lent to a Canadian corporation, the condition that the lender must be dealing at arm's length with the borrower is applied to the partnership rather than the partners.

1998 Ruling 9817073 - DISCOUNT BONDS

discount treated as interest when paid

A note would be offered at a significant discount from the stated principal amount and no cash interest would be payable thereon prior to a date that appeared to be after the fifth anniversary. RC ruled that the discount would be treated as interest for purposes of s. 212(1)(b)(vii) when paid.

1997 IFA Round Table, Q. 5, No. 9713180

asset disposition triggering offer to repurchase

RC's policy that asset dispositions may be permitted to be a triggering event requiring the borrower to repay includes involuntary dispositions such as involuntary loss or destruction of the property resulting in the receipt by the borrower of expropriation or insurance proceeds - provided that under the terms of the agreement, the receipt of the proceeds is considered a triggering event requiring an offer to redeem the debt and the failure to make such an offer as a listed event of default.

30 November 1995 Ruling 9629853 - CHANGE OF CONTROL TRIGGERING EVENT

de facto change of control

Ruling given on a loan whose definition of change of control included a situation where persons other than existing holders became the beneficial owner of more than x% of the total voting power attributable to the common shares, and the existing owners beneficially own a lower percentage of the total voting power than such persons.

2 September 1998 Technical Interpretation 980737

FX movement not an event of failure or default

A requirement to repay a U.S.-dollar loan in the event that the Canadian-dollar equivalent of the borrowing appreciates to 110% of the Canadian-dollar equivalent amount at the time of initial borrowing would not qualify as a requirement to repay in the event of a failure or default.

21 July 1999 External T.I. 9915455 - POST-AMBLE TO 212(l)(B)

stock price covered in participating interest

"Interest payments which fluctuate on the basis of a formula that seeks to determine the extent to which the stock price of the borrower either out-performs or under-performs the short-term money market index would fall within the broad concluding words of" the postamble.

4 March 1999 Technical Interpretation 982412

right to require conversion into different notes

Where a debenture will become convertible (apparently, at the option of the holder) into deposit notes of the issuer once the issuer has obtained the approval of the Superintendent of Financial Institutions, it will not qualify for the exemption from the date of issue. "[T]he proposed addition of the conversion right, even if done solely at the issuer's discretion, constitutes a circumstance under which the issuer of the obligation may be obliged to pay more than 25% of the principal amount of the obligation within 5 years."

Income Tax Technical News, No. 15, "The Tax Consequences of the Adoption of the 'Euro' Currency"

Discussion of whether the redenomination, renominalization or reconventioning of an obligation would give rise to a new obligation.

30 November 1997 Ruling 9813393 - XXXXXXXXXX - EVENT OF DEFAULT

requirement to apply remaining asset sales proceeds

The description of facts included a requirement on the Canadian issuer of notes to use asset sale proceeds, that had not been applied within the 360-day period to pay down more senior debt or purchase qualifying replacement assets, to repurchase the notes for the amounts owing.

Income Tax Technical News, No. 11, September 30, 1997, "U.S. Spin-Offs (Divestitures) - Dividends in Kind"

The postamble usually will not apply to disqualify interest on a debt instrument that varies according to the value of foreign currency. The purpose of the postamble is "to prevent the parties from mischaracterizing a payment as exempt interest when it is really a distribution of earnings" and, "in cases of uncertainty it should be the underlying economic substance of a payment, and not the method of measurement per se, that determines whether or not it is interest ...".

9 September 1997 External T.I. 9721405 - CONVERSION OF DEBT OBLIGATION

notice by issuer before convertible

Where a debt obligation provides that it is convertible at the option of the holder into another debt obligation of the same issuer provided that the issuer has first given notice to the holders allowing them to make such a conversion, the exemption in s. 212(1)(b)(vii) will not be available given the breadth of the phrase "under any circumstances": these words "include the situation of a possible payment by the issuer even where both the issuer and holder must independently take steps to cause the holder's right of conversion to be exercised.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) conversion conditional on issuer notice 173
Tax Topics - Income Tax Act - Section 51.1 conversion subject to issuer notice 173

Income Tax Technical News, No. 9, 10 February 1997

events must be beyond borrower's control

RC will "continue to accept circumstances such as, change of control, ratings decline or asset sales as being events of failure or default under a particular loan agreement although they may not be listed defaults under the terms of the agreement. However, the Department will continue to maintain that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender and must not be contrived."

30 November 1996 Ruling 9723563 - CHANGE OF CONTROL - LISTED EVENT OF DEFAULT

change of control cured with offer to repurchase

Favourable ruling with respect to notes issued to U.S. residents that provide that upon the occurrence of a Change of Control (as defined), there is an Event of Default which the issuer may cure by making an offer to purchase all outstanding notes at a percentage of their principal plus accrued and unpaid interest.

30 November 1996 Ruling 9702203 - WITHHOLDING PART XIII

The impetus for amendments to a trust indenture came from the taxpayer and the persons who took it over. Accordingly, the method chosen by the taxpayer to follow through on its voluntary offer to redeem debentures did not cause it to be considered to be obligated to redeem the debentures within five years of the date of their original issue.

30 November 1995 Ruling 9629853 - CHANGE OF CONTROL TRIGGERING EVENT

Ruling given on a loan whose definition of change of control included a situation where persons other than existing holders became the beneficial owner of more than x% of the total voting power attributable to the common shares, and the existing owners beneficially own a lower percentage of the total voting power than such persons.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Subparagraph 212(1)(b)(vii) de facto change of control 57

1996 TEI Round Table, Part VII, Q. B., 9640070

Until several cases before the courts have been decided, RC is deferring implementing a recommendation that certain lease transactions that are treated as financed purchases for purposes of ss.18(1)(b) and 16(1) be treated as such for all purposes of the Act.

1996 Ruling 961368

With respect to a situation where a taxable Canadian corporation made an offer to purchase at a premium outstanding notes that were eligible for the exemption under s. 212(1)(b)(vii), RC ruled that provided that the premium "cannot reasonably be considered to have been made in respect of the substitution of the Notes into another debt obligation", the premium will be exempt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1) 64

18 January 1996 External T.I. 9530045 - COMMODITY REFERENCE IN PAYING INTEREST

Where interest on a debenture is paid by way of the issue of a fixed number of common shares, it would appear that the interest would be computed, at least in part, by reference to a commodity price.

1996 Corporate Management Tax Conference Round Table, Q. 8

Where s. 212(13.2) applies to deem a U.S. corporation to be a person resident in Canada for Part XIII purposes, interest paid by it will represent "interest payable by a corporation resident in Canada" for purposes of s. 212(1)(b)(vii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(13.2) 76

30 November 1995 Ruling 9623193 - WITHOLDING TAX ON INTEREST

Where notes initially are issued on an unregistered basis to qualified investors in order to effect placement of the issue on a timely basis, the subsequent registration of freely tradeable notes in replacement of the initial note will not result in new indebtedness for purposes of s. 212(1)(b)(vii).

25 August 1995 External T.I. 9517335 - CONVERTIBLE DEBENTURES WITH ANTI-DILUTION CLAUSE

Where debentures are convertible only into prescribed securities, but there is an anti-dilution clause that provides that in the event of a reorganization, the debentures may become convertible into non-prescribed securities, the debentures will not qualify for the exemption.

10 December 1993 Income Tax Severed Letter 9333055 - Witholding Tax Exemption

"In a situation where interest is computed by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation, the interest shall be deemed not to be interest for purposes of subparagraph 212(1)(b)(vii) of the Act, by virtue of the postamble thereto, notwithstanding that the dividend component of a particular formula at the time of payment of interest is nil."

93 C.M.TC - Q. 8

RC does not consider the Viceroy Rubber case to have precedential value because of its unusual facts and will maintain its policy in IT-361R2, para. 9, that financial leases are not obligations that can meet the requirements of s. 212(1)(b)(vii).

93 C.M.TC - Q. 7

RC's concern with cash collateral accounts is that in some situations it may have been intended from the outset that the borrower would pay down the loan instead of leaving money on deposit with a third party. Where the obligation to contribute to a cash collateral account arises in the event of a contingency beyond the control of the lender, such as a requirement to deposit insurance or expropriation proceeds in respect of property that represents security for the loan, such condition by itself will not result in the loss of the exemption.

93 C.M.TC - Q. 6

Where, upon default, the non-resident lender, rather than demanding repayment, agrees with the Canadian borrower that payment will be deferred as long as certain financial conditions are met, it will become a question of fact whether a new obligation has been created, giving rise to loss of the exemption. It would be unusual to say that a new obligation has been created merely because demand for the payment has been deferred.

92 C.M.TC - Q. 13

If the primary purpose of a loan to a newly incorporated subsidiary of a corporate partner in a partnership, with a view to the subsidiary then on-loaning the proceeds to the individual and corporate partners, is to obtain the exemption under s. 212(1)(b)(vii), s. 245(2) likely will be applicable.

91 C.R. - Q. 50

The deposit of funds by a non-resident person with a non-resident financial institution which lends those funds to a Canadian corporation not dealing at arm's length with the non-resident would be an avoidance transaction subject to s. 245(2).

91 C.R. - Q. 17

corporate option to pay cash

A debenture which is exchangeable at the option of the holder for shares of the issuer, based on a formula using the most recent market price but with a right, on the part of the corporation, to pay cash of equal value to the debenture holder, will qualify under s. 212(1)(b)(vii)(E).

28 August 1991 Memorandum (Tax Window, No. 8, p. 23, ¶1434)

Where a non-resident person which does not deal at arm's length with a Canadian borrower deposits funds with a non-resident financial institution and the financial institution lends money to the Canadian borrower, s. 245(2) may be applied to deny the exemption which otherwise might be applicable to interest paid to the financial institution.

19 August 1991 T.I. (Tax Window, No. 8, p. 22, ¶1431)

The exemption in s. 212(1)(b)(vii) will not apply where the terms of a debt obligation require the debt to be repaid within five years from the date of issue in the event of a specified action taken by a party outside the issuer's control, such as a shareholder of the issuer.

9 August 1991 T.I. (Tax Window, No. 7, p. 22, ¶1391)

Interest which fluctuates on the basis of fluctuations in the value of a foreign currency may be considered to be computed by reference to a "similar criterion" for purposes of the postamble.

29 July 1991 T.I. (C.T.O. Fax Service Doc. No. 305; Tax Window, No. 7, p. 12, ¶1374)

The exemption will cease to apply if and when the debtor ceases to be at arm's length with the creditor and, conversely, will begin to apply if and when the debtor begins to be at arm's length with the creditor provided all other requirements are met.

Discussion of effects of assignments or assumptions of the debt.

Because the exemption applies only to interest that is "payable", i.e., accrued and owing, prepaid interest is not eligible for the exemption.

An interest gross-up clause will not disqualify the debt notwithstanding that when the gross-up clause comes into effect the debtor may consider that it has no practical alternative but to exercise its right to prepay the debt.

10 June 1991 T.I. (Tax Window, No. 4, p. 23, ¶1289)

None of the exemptions in s. 212(1)(b) will apply to the taxable dividend received by a shareholder of a mortgage investment corporation, notwithstanding that such dividend is deemed to be interest.

23 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 5, ¶1038)

The exemption will not apply to interest paid by a partnership of resident Canadian corporations unless all members of the partnership deal at arm's length with the non-resident recipient of the interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(4) 20

25 January 1990 T.I. 5-8575

Where the terms and conditions of a debt obligation provide for legal defeasance at the time the obligation is issued, this may result in the issuing corporation being obliged to pay more than 25% of the principal within five years from the date of issue.

2 January 1990 T.I. (June 1990 Access Letter, ¶1280)

Once Regulation 6208 is passed, a non-resident should be entitled to a refund of withholding tax paid after December 19, 1986 on debentures convertible into prescribed securities.

89 C.R. - Q. 1

In a situation wherein a loan agreement states that there is an event of default if there is a change in control of the borrower, such event is generally considered an 'event of default'.

89 C.R. - Q. 2

"Where interest amounts are fixed and payable pursuant to a legal obligation to pay interest at a fixed rate, the fact that the timing of the interest payments is variable based on the above criteria [profit, cash flow, etc.] would not prevent the application of the exemption ... However, all unpaid interest should be due in any event, no later than the due date of the obligation."

89 C.R. - Q. 3

The deposit by a non-resident of funds with the non-resident financial institution that in turn loans funds to a Canadian corporation with which the non-resident individual does not deal at arm's length could constitute an avoidance transaction. Assuming that it is an avoidance transaction, it would be considered to be a misuse of s. 212(1)(b)(vii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 58

88 C.R. - "Finance and Leasing" - "Withholding Tax"

Ordinarily a change in debt holders will not cause a loss of the exemption - cf., if a new debt results.

87 C.R. - Q. 2

The exemption potentially can apply to interest on the unpaid balance of the selling price of property.

86 C.R. - Q. 11

It is permissible for the loan agreement to provide that the insurance proceeds are to be deposited with an independent party for the reconstruction of the secured project; the lender must not be entitled to require that they be used to repay the loan.

86 C.R. - Q. 12

A requirement to pay because of a change in economic conditions, e.g., commodity prices, is not permissible.

84 C.R. - Q. 38

Loss or destruction of property may represent an event of default, in which event it is permissible for the borrower to be required to repay.

84 C.R. - Q. 60

Where a Canadian corporation has debt in currency X and borrows currency Y under a currency swap arrangement, the interest payments made by Canco on the Currency Y debt will be exempt provided that the terms of the Currency Y debt conformed to s. 212(1)(b)(vii).

ATR-69, dated April 20, 1995

Favourable ruling given with respect to a requirement to repurchase 10-year notes at 101% of their principal dollar amount in the event of the occurrence both of a change of control (as defined) and a ratings downgrade by Moody's or Standard & Poor's.

ATR-49

Description of exempt loan to finance construction of manufacturing plant where each drawdown constitutes a separate loan and failure to complete the construction within five years constitutes an event of default.

IT-155R3 "Exemption from Non-resident Tax on Interest Payable on Certain Bonds, Debentures, Notes, Hypothecs or Similar Obligations"

An amount paid by a guarantor in respect of interest payable under a guaranteed obligation is subject to the withholding tax unless the obligation is one on which the interest is exempt under one of the exemptions in s. 212(1)(b).

IT-361R2 "Exemption from Tax on Interest Payments to Non-residents"

General discussion.

Read, "Technical Matters", 83 C.R., p. 783

A cross default provision can, depending upon the facts, constitute a legitimate event of default. Events that are the consequence of an act by persons not party to the agreement, e.g. regulatory bodies, can't be considered an event of default.

The expression "terms of agreement" can be interpreted to include terms of related agreements.

Articles

Robert A. Kopstein, Janette Y. Pantry, "Subparagraph 212(1)(b)(vii) Withholding Tax Exemption", 2005 Conference Report, c. 15.

Julie Colden, "Implications of Imperial Oil", Canadian Current Tax, Vol. 15, No. 3, December 2004, p. 21.

Jack A. Silverson, "The New Trust Proposals in Section 212(1)(b)(vii)", Corporate Finance, Vol. VII, No. 2, 1999, p. 615.

Smith, "Recent Transactions: Debt", 1993 Conference Report, C. 19

Discussion of Hollinger Lyons transaction (including cash equivalent option, and change in control definition).

Richardson, "European Currency Unit: A Currency for All Seasons", Corporate Finance, Vo. 1, No. 2, 1992, p. 43

The ECU qualifies as a currency other than Canadian currency.

Wilkie, "Issues Impacting on Exposure to Canadian Withholding Tax", Corporate Finance, Vol. 1, No. 1, 1992, p. 17.

Richardson, "Current Developments in Debt Financing: A Canadian Tax Perspective", 1988 Conference Report, C.22: Discussion of "poison puts".

Hansen, Richardson, "How Canadian Issuers Use Short-term Instruments", International Financial Law Review, February 1987, page 11

Description of "put-option structure".

Wilkie, "Structuring International Debt Issues: A Canadian Perspective", Canadian Tax Journal, January-February 1987, page 1

Compendium of various s. 212(1)(b)(vii).

Couzin, "Canada: Withholding Tax and Interest", Tax Management International Journal, January 1982, page 14

Comprehensive discussion.

Loveland, "Income Tax Impediments to Foreign Investment in Canada", 1982 Conference Report, page 666

RC will not disagree with an ordering provision respecting the repayments of separate drawdowns provided the ordering is reasonable.

Paragraph 212(1)(c) - Estate or trust income

Administrative Policy

30 November 2001 External T.I. 2001-0100125 F - Traitement fiscal fiducies-sûreté

a disposition on the transfer of Canada bonds by a non-resident to a security trust signified that interest distributions by the trust were subject to withholding under s. 212(1)(c)

For the sole purpose of guaranteeing the repayment of a loan from a Canadian financial institution, a non-resident transfers his Canada Savings Bonds to a security trust created under the Civil Code of Québec. CCRA indicated that (given that the exceptions to a disposition under para. (c) of “disposition” did not extend to para. (j) thereof, that there was a disposition on the transfer of the bonds to the trust. As a result, the trust would be considered to earn the bond interest and the distribution of that income to the non-resident would be subject to tax under s. 212(1)(c) and s. 212(11).

A different result would have been obtained if the transfer to the security trust fell within para. (k) of "disposition" (in which event, pursuant to s. 248(25.2), the trust would be deemed to be the non-resident’s agent, so that interest paid in respect of Canada Savings Bonds would be considered to be paid directly to the non-resident, who could then benefit from the government bond exemption in s. 212(1)(b)(ii)(C)).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (j) exclusions from a disposition under para. (c) on a transfer to a trust do not extend to para. (j) exclusion 317

2014 Ruling 2013-0509431R3 - Part XIII tax and distributions from a trust

distributions to U.S. residents funded out of ROC payments and cross-border interest

The Fund is a listed mutual fund trust which is not fiscally transparent for U.S. tax purposes. It is not subject to SIFT tax as essentially its only assets are shares of "Can Holdco" and interest-bearing debt ("US Opco Notes") of the wholly-owned U.S. subsidiary of Can Holdco ("US Opco"). US Opco uses the periodic proceeds of issuances by it of US Opco Notes and shares to acquire properties in the U.S.

Distributions by the Fund to its unitholders are funded out of interest received by it on the US Opco Notes and by return-of capital distributions received by it on its shares of Can Holdco (which in turn would be funded by return-of capital distributions received by Can Holdco on its shares of US Opco.) The Fund deducts under s. 104(6)(b) to the extent of its income. The units held by unitholders will include units to be issued on conversion of convertible debentures of the Fund.

Rulings that:

  • To the extent that a portion of a distribution from the Fund to a non-resident unitholder is in excess of the amount that is included in the unitholder's income of such unit holder under s. 104(13), s. 212(1)(c) will not apply so that the Fund is not required to withhold.
  • If the distribution is made to a unit holder who qualifies for the benefits of the Canada-U.S. Tax Treaty, the portion of the distribution made out of income earned outside of Canada is not subject to Part XIII tax as it satisfies the exemption in Art. XXII of the Canada-U.S. Tax Treaty.
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 22 distributions to U.S. residents funded out of ROC payments and cross-border interest 277

18 November 2011 External T.I. 2011-0422441E5 - Capital dividend paid to a Non-Resident

redistribution of capital dividend subject to Part XIII tax

Shares of a Canadian-controlled private corporation held by the estate were redeemed for cash proceeds, with the resulting deemed dividend paid out of the corporation's capital dividend account. Would this amount when redistributed to a non-resident be subject to Part XIII tax? CRA responded:

Any capital distribution made by a trust or an estate is subject to Part XIII tax to the extent that it is an amount described in subparagraph 212(1)(c)(i) or (ii)… .Subparagraph 212(1)(c)(ii)… provides that an amount that may reasonably be considered to be a distribution of, or derived from, a "dividend that is not a taxable dividend" (e.g. a capital dividend) received by the trust or estate on a share of the capital stock of a corporation resident in Canada is subject to Part XIII tax. Part XIII tax must be withheld by the payer and remitted on behalf of the non-resident… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(11) redistribution of capital dividend subject to Part XIII tax 194

9 October 2009 APFF Roundtable Q. 5, 2009-0327001C6 F - Succession canadienne - dividende en capital

allocation of capital dividend between estate duties and NR distribution

When a capital dividend (arising from insurance proceeds) received by an estate is used for the payment of estate taxes, would the distribution of the remainder of the estate to the heirs be excluded from the application of ss. 212(11) and 212(1)(c)? CRA responded:

[A]lthough an amount paid in favour of a Canadian estate as a capital dividend is used for the payment of estate taxes, the question of determining if a subsequent distribution in favour of non-resident beneficiaries can reasonably be considered to be a distribution of an amount received by the estate, or derived from such an amount, as a dividend is a question of fact. … Where applicable, the distribution would be subject to a withholding tax pursuant to subsection 212(11) and paragraph 212(1)(c)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(11) allocation of capital dividend between estate duties and NR distribution 131

July 1990 Memorandum

Distributions of income of a trust from Canadian term deposits or bank accounts to the State of Israel was exempted from withholding tax on the basis of the doctrine of sovereign immunity.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) 34