Subsection 212(1)

Subtopics

Cases

Transocean Offshore Ltd. v. Canada, 2005 DTC 5201, 2005 FCA 104

damages to lessor for advance lease repudiation were in lieu of rent

Lump-sum damages received by the non-resident taxpayer from Canadian residents for the repudiation, prior to the slated operational commencement date, of a bare-boat charter of a drilling rig owned by its parent, were found to be payments received in lieu of the payment of rent, so that it was not entitled to a refund of Part XIII tax withheld. After noting (at para. 45) that "rent is defined as an amount paid as compensation for the use or occupation of property, or for the right to use or occupy property", and that the references to payments made "on account of" such compensation or "in satisfaction of" such compensation would "appear to cover virtually all situations in which a payment is made to discharge, in full or in part, an obligation to pay compensation to a non-resident for the past or current use, in Canada, of property", Sharlow J.A. went on to state (at paras. 47-48):

The ordinary meaning of the phrase 'in lieu of'', according to a number of dictionaries, is 'instead of'' or 'in place of' ... . It seems axiomatic that an amount that is paid instead of a payment of a particular legal character, or in the place of such a payment, does not have the same legal character ... "If the phrase 'in lieu of rent' is interpreted to include only payments made as compensation for the past or current use of property, which essentially the position of counsel for Transocean, it would add nothing to paragraph 212(1)(d) ... .

Puder v. MNR, 63 DTC 1282 (Ex Ct) imposed "an unjustifiably narrow meaning on the phrase 'in lieu of'" as it failed to recognize that "a thing may take the place of another thing if it...performs a function that is not exactly the same but is a reasonable substitute" (para. 60).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus no onus to rebut a factual assmption re something not within the taxpayer's purview 67

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

sale of bond with accrued interest did not satisfy interest

A Canadian subsidiary ("Place Victoria") of a non-resident corporation ("SGI") decided in 1966 with the approval of SGI and the other debentureholders to postpone, by two years, the payment of interest on debentures held by SGI and the other debenture holders before the interest became payable. Later in 1966, SGI sold those debentures (including accrued interest which would have been previously payable but for the postponement) to the defendant, which was a second Canadian subsidiary of SGI, in consideration for debentures of the defendant.

After finding that the sale did not trigger withholding tax on the payment of the purchase price by the defendant to SGI, on the basis of the principle that a purchase of a debt obligation does not entail a payment of the interest thereon (see summary under s. 212(1)(b)), Addy J stated (at p. 5335):

Surely, the payment by the Defendant cannot be "in lieu of or in satisfaction of" any part of the accrued interest owed by Place Victoria. The latter still owed every penny of the interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) sale proceeds allocable to expectancy of interest were not interest receipt 198
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

Richard Lewin Re: The J.J. Herbert Family Trust #1 v. The Queen, 2011 DTC 1354 [at 1979], 2011 TCC 476, aff'd 2013 DTC 5006 [at 5525], 2012 FCA 279 [but overridden by s. 214(3)(f)(i)(C)]

dividend payable but not yet paid

The taxpayer was a trustee for a family trust, which received a dividend in 2001 of over $2 million. The trust adopted an unconditional resolution on 11 September 2001 to pay a distribution of the dividend to the non-resident capital beneficiary, with the beneficiary having the right to require payment to himself at any time. The taxpayer then resigned as a trustee on 12 January 2002 and the beneficiary was paid on 18 January 2002. The trust failed to withhold and remit the 25% Part XIII tax.

Bédard J. found that the taxpayer was not liable under s. 215(6) for the failure to remit because s. 212(1) specifies that the trustee's withholding obligation arises in respect of amounts paid or credited rather than payable. While the dividend was payable from the date of the resolution, the taxpayer resigned before it was actually paid.

Bédard J. rejected the Minister's contention that "to credit" in s. 212(1) "refers to a situation where a creditor has the right to enforce payment of a sum but grants the debtor deferral" to a later time (para. 11). If a person has a right to enforce payment of an amount, then the amount is, by definition, payable to that person. The Minister's definition of "to credit" would therefore have the effect of replacing the phrase "pays or credits" in s. 212 with "makes payable" (para. 41). Bédard J. concluded (at para. 61):

[T]he Court should adopt the definition of "credited" suggested by the CRA and interpret it as meaning: the unconditional placing of funds - on a practical level - at the disposal of the Beneficiary in fulfilment of the Trust's obligation to pay.

Words and Phrases
credit

La Compagnie Minière Québec Cartier v. M.N.R., 84 DTC 1348, [1984] CTC 2408 (TCC)

mere book entry not "crediting"

The taxpayer received demand loans from its U.S. parent which provided for the semi-annual payment of interest but provided that the taxpayer, on giving ten days' prior written notice, could elect that interest which otherwise would become due on a semi-annual payment date would be added to the principal amount. In its books of account, the taxpayer credited 85% of the capitalized interest as an amount owing to the non-resident creditor, and 15% as an amount owing to the Receiver General. In finding that interest which had been so capitalized had not been "credited", Tremblay J. stated (p. 1357) that in his view:

"A strict interpretation of s. 212(1)(b) leaves to interpreting the word 'credit' according to its substance, 'making available to', and not according to the form of making an entry 'on the right side of an account'."

Words and Phrases
credit

Administrative Policy

17 May 2022 IFA Roundtable Q. 2, 2022-0926461C6 - Royalty Apportionment 212(1)(d)(vi)

CRA has authority to re-apportion where a royalty allocation is not “reasonable and realistic”

Is CRA is bound for Part XIII tax purposes by the apportionment of a royalty payment between copyright (exempted under s. 212(1)(d)(vi)) and trademarks agreed to by arm’s length parties in a royalty agreement respecting property that is protected by both trademark and copyright (a “mixed contract”)? Without referring to s. 68, CRA stated:

An apportionment of a royalty payment agreed to by arm’s length parties under a mixed contract, to the extent that it is reasonable and realistic, in the sense that it is reflective of the actual consideration paid for a copyright described under subparagraph 212(1)(d)(vi), will generally be accepted by the CRA. …

In determining if an apportionment provided under a mixed contract is reflective of the obligation of the parties under subsection 212(1), consideration would be given, amongst others, to the terms of the mixed contract and to whether the parties have divergent interests in respect of this apportionment. Where the payor is economically indifferent to the apportionment, the apportionment provided under the terms of the mixed contract might not be reasonable, realistic and reflective of the tax obligation of the recipient under subsection 212(1)(d) and the CRA might determine that a different portion of the payment is subject to withholding tax.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(vi) allocation by arm’s length parties of royalty between copyright and trademark must be “reasonable and realistic” 208

2018 Ruling 2017-0738041R3 - XXXXXXXXXX

collective investment vehicle treated as transparent for Pt XIII purposes

Investors subscribe for units of a “Fund”, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described as representing proportionate interests in the property of a particular Subfund (holding a particular managed portfolio) but with an entitlement to exchange their co-ownership interest in that Subfund’s property for that in another Subfund.

Investors with different tax profiles are required to invest in separate Classes of units so that there is no pooling of withholding tax rates applicable to the securities in a Subfund’s portfolio.

The non-resident Depositary deals at arm’s length with the non-resident manager, and the Canadian securities are held by a Canadian-resident custodial subsidiary of the Depositary.

CRA ruled that the funds were fiscally transparent, so that non-resident investors holding units in a Subfund that, in turn, held Canadian equities, would be treated for Canadian withholding tax purposes and s. 116 purposes in the same manner as if they received a pro rata distribution on or proceeds of the Canadian securities.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) a foreign collective investment vehicle is fiscally transparent rather than a unit trust 524

14 July 2015 External T.I. 2013-0499621E5 - Paragraph 212(1)(d) and Credited

crediting through note reduction

A royalty charged by a U.S. resident (the "Licensor") to a corporation resident in Canada (the "Taxpayer") was, in lieu of payment by the Taxpayer to the Licensor, used to reduce the amount of a promissory note owing by the Licensor to the Taxpayer. Would s. 212(1)(d) apply to the full amount of such reduction? Before finding that "the entire amount of the royalty payable that is applied to reduce the Note would be [considered] credited to the non-resident and, therefore, subject to…withholding tax," CRA stated:

Generally, the words "credits" and "credited" cover any situation where a resident of Canada or, in certain cases a non-resident, has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident. In particular, as described in subparagraph 5(d) of [IC] 77-16R4, a resident of Canada would be considered to have credited an amount to a non-resident where the amount due was applied...against an amount owing...to the resident of Canada.

10 March 2015 Internal T.I. 2015-0574291I7 - XXXXXXXXXX Termination Payment

lease termination payment received by lessor in lieu of rent

A property was leased by LP to Canco for use in Canada, with LP's interest subsequently being acquired by Forco. The relevant "Master Agreement" provided for the making of a specified "Termination Payment" on "Early Termination" of the lease. This occurred. CRA stated:

[T]he Early Termination Payment will be made by Canco to Forco as consideration for the termination of the XX under which rent would have been payable for the use of the Canadian XX Property. As such… the Early Termination Payment will be an amount paid by a resident of Canada (Canco) to a non-resident of Canada (Forco) in lieu of payment of rent for the use of, or for the right to use in Canada, a property…such that Part XIII withholding tax will apply pursuant to paragraph 212(1)(d)… .

Our conclusion is…supported by…Transocean… .

17 May 2012 IFA Roundtable Q. 2, 2012-0444051C6 - 2012 IFA Seminar - Q.2 Reduced Tax Withholdings

In response to a request for confirmation that taxpayers should not be subject to assessment for under-withholding if the applicable forms (NR301, 302 and 303) have been completed, CRA noted that it "recommends that payers or intermediaries collect the information requested on forms NR301, NR302, and NR303 since this information on beneficial ownership, residency, and eligibility for treaty benefits is generally the information the payer or intermediary will need to establish that a tax treaty rate applies." If CRA issues an assessment, the amount assessed is also subject to a penalty. Where the taxpayer requests a waiver for penalty and/or interest under s. 220(3.1), CRA:

will consider whether a taxpayer has exercised a reasonable amount of care when deciding if relief is warranted. The payer’s level of effort to collect the forms or the information requested on them (a written declaration by the non-resident of beneficial ownership, residency, and eligibility for tax treaty benefits) in order to determine and apply the correct tax rate is important.

27 August 2012 External T.I. 2011-0416181E5 - US internet publisher - CDN resident advertiser

A US website publisher enters into an arrangement with an independent Canadian-resident promoter (the "Promoter") under which the Promoter will sell advertising space on the website to Canadian advertisers. A Canadian advertiser would agree to pay the Promoter a fee of, say, $100 for every 1,000 "clicks" generated on the advertiser's ad. The Promoter would retain, say $20 of this fee and remit the remaining amount to the US publisher.

Before going on to consider the application of ss. 212(1)(d)(i) and (iii), CRA noted that although the inquiry asked only about the witholding tax treatment of the amount remitted by the Promoter to the US publisher, it considered the gross amount of the fees to be paid or credited by the Canadian advertisers to the US publisher, on the basis that it considered that the Promoter would be receiving the fees from the Canadian advertisers as agent for the US publisher.

Information Circular IC76-12R8 Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention

Due diligence requirements re payers

¶ 20. If a payer witholds Part XIII tax based on the information the non-resident payee provided on forms NR301, NR302 and NR303 or in another declaration, but the CRA later determines that insufficient tax was withheld on the payment, the payer or their agent may be held liable for the deficiency, as well as for interest and penalties.

The payer can ask for relief on penalties and interest by writing to their tax services office or by submitting a completed Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. One of the factors that the CRA considers in deciding whether to grant this relief is whether the payer used a reasonable amount of care and due diligence in getting the necessary information from the non‑resident. Collecting the appropriate forms or equivalent information will help show the payer tried to apply the correct tax rate.

¶ 21. If a payer has reason to believe that a limiting provision in the relevant tax convention will restrict the application of treaty benefits, the payer must either withhold the full 25% tax or obtain certification from the recipient stating that they are eligible for treaty benefits.

¶ 22. If there is reasonable cause to doubt the declarations received, the payer must ask for more information or investigate further before applying a treaty withholding rate. For more information, see “Instructions for payers” on forms NR301, NR302 and NR303. Examples of where a payer needs to carry out additional verification include:

  • a non-resident payee notifies the payer about a change in address that shows a different country than the country of residence listed on the forms already on file
  • a non-resident payee is a flow-through entity whose membership is likely to have changed since they provided their Form NR302 or Form NR303
  • the form on file is expired

No need to withhold on payments made to non-residents through CDS

¶ 31. Tax is not withheld on interest, dividend or trust income payments made to CDS Clearing and Depository Services Inc. (CDS) on securities registered in the name of Cede & Co. Tax on these payments is withheld by CDS based on information it receives from the Depository Trust Company (DTC) and collected by DTC participants. The supporting information required is the same as outlined in paragraph 20 of this circular.

21 April 2008 Internal T.I. 2007-0251761I7 F - Billet à payer

addition of unpaid interest to principal was not a payment or crediting of the interest so as to engage Pt. XIII tax

Debt owing to the taxpayer following an asset sale provided that interest may be added to the principal of the debt, which is what occurred. The taxpayer considered that it had paid the accrued and capitalized interest each year, and withheld pursuant to s. 212(1)(b) and added the interest, net of withholding tax, to the balance of its debt. In finding that instead, no Pt. XIII tax had been triggered, CRA applied Quebec Cartier Mining to conclude that the taxpayer did not pay the increased and capitalized interest on an annual basis and did not credit the vendor with such interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(d) addition of unpaid interest to principal did not establish a loan of that interest or a novation of the debt – so that interest on such capitalized interest non-deductible until paid 243
Tax Topics - General Concepts - Payment & Receipt addition of unpaid interest to principal was not a loan of money, nor a payment or crediting of interest 159

Income Tax Technical News, No. 14, "Meaning of 'Credited' for the Purpose of Part XIII Withholding Tax" (CANCELLED).

journal entry not crediting

[T]he mere recording of the payable by way of journal entry, regardless that such amounts are payable on demand and the debtor has the capacity to pay such amount if such payments are demanded, does not constitute "credited" for purposes of subsection 212(1).....

While...for an amount to be "credited," an amount must be set aside and made unconditionally available for the non-resident more or less along the lines of those examples described in paragraph 5 of...77-16R4, each case should be decided on the basis of its own particular facts. This position would seem to be consistent with...Quebec Cartier Mining...84 DTC 1348 (TCC).

12 June 1996 External T.I. 9619795 - MEANING OF "PAID OR CREDITED"

"An amount is 'credited' where a resident of Canada has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident. An amount is unconditionally available to the non-resident person when the non-resident has the immediate right to receive the amount, for example, when the amount is recorded in the payer's books and is payable on demand." It was quite possible that no amount would be considered to have been paid or credited to a U.S. resident where the question of ownership of the relevant property was subject to litigation.

Words and Phrases
credited

5 January 1996 CTF Roundtable Q. 31, 9523976 - GROSS-UP PAYMENTS

Where a gross-up is paid or credited by a Canadian resident to a non-resident pursuant to a loan agreement that is not otherwise exempt from withholding tax, withholding tax "is generally required whether or not the gross-up meets the legal definition of interest because the preamble to paragraph 212(1)(b) of the Act refers to amounts paid or credited, 'as, on account or in lieu of payment of, or in satisfaction of, ... interest'".

27 October 1995 External T.I. 9516265 - EPSP - NON-RESIDENT BENEFICIARIES

The deemed receipt of dividends under s. 144(8) does not cause such amounts to be paid or credited for purposes of Part XIII of the Act.

26 April 1995 External T.I. 9502165 - SYSTEMS/OPERATING SOFTWARE

shrink wrap exception applied to systems software

"In a situation where the systems/operating software is sold in a manner that is similar to the sale of shrink-wrap computer software and is sold subject to a general licensing agreement which does not identify the particular end-user or the amount of the licence fee, it is our view that such systems/operating software would not be subject to tax under Part XIII of the Act as it would be considered to be a sale of tangible property."

17 October 1994 External T.I. 9418075 - WITHHOLDING TAX

See also 9410965.

"Where a financial institution credits the interest earned on a compound interest investment to a non-resident person's investment account annually but the interest cannot be accessed until the maturity of the investment, the death of the non-resident person or the redemption of the investment due to financial hardship, it is our view that the non-resident person is not subject to tax pursuant to paragraph 212(1)(b) ... at the time the interest is credited to the investment account because the amounts are not unconditionally available to the non-resident person." "In the situation where a financial institution credits the interest earned on a compound interest investment to a non-resident person's investment account annually but the interest cannot be accessed until the maturity of the investment, the death of the non-resident person or the redemption of the investment due to financial hardship, it is our view that the non-resident person is not subject to tax pursuant to paragraph 212(1)(b) of the Act at the time the interest is credited to the investment account because the amounts are not unconditionally available to the non-resident person."

15 April 1994 External T.I. 9402905 - WITHOLDING TAX EXEMPTION ON MEDIUM TERM DEBT

Because s. 212(1)(b) is applicable to payments in lieu of payments of interest, a participation payment may be subject to withholding tax notwithstanding that it is not interest under general legal principles.

91 C.R. - Q.48

Re when an amount is "credited".

19 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 22, ¶1040)

Interest on a debt owed by a Canadian resident to a non-resident is not credited merely by reason of having been accrued and reflected in the books of the Canadian resident, provided that no funds are set aside or made available to the non-resident.

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.

86 C.R. - Q.84

In non-arm's length situations, an amount is "credited" once journal entries have been made to record the amount in the payer's books, if no due date is specified.

84 C.R. - Q.17

RC accepts the Quebec Cartier Mining case. Thus, unless there is an amount at the non-resident's disposal, no amount will be considered to be "credited".

IC 77-16R4 "Non-Resident Income Tax", para. 5

The word "credits" covers any situation where a resident of Canada has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident.

Pending updates to IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention related to forms NR301, NR302, and NR303

IC76-12R6 "Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention"

Articles

Nakul Kohli, Jiani Qian, "Canadian Residents Earning Income Through Non-Resident US LLCs", Canadian Tax Focus, Vol. 12, No. 1, February 2022, p. 10

Canadian residents generally are better off investing in a portfolio that may include Canadian companies through a partnership rather than an LLC (p. 10)

  • Where an LLC with both Canadian- and US-resident members receives a dividend from a Canadian corporation, the US members may benefit from Art. IV(6) of the Treaty so as to reduce the dividend withholding tax rate to 15% or 5% - but there is no Treaty reduction to the Canadian withholding tax rate regarding the indirect interest in that dividend of the Canadian members.
  • Contrast this with the receipt of the same dividend by a partnership with US and Canadian partners - form NR302 generally provides for look-through treatment of the partnership so that, with proper documentary support, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners.
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 4 213

Steve Suarez, "Canada Extends Transition Period for Treaty-Reduced Nonresident Withholding", Tax Notes International, 27 February 2012

Notes that CRA does not consider preparation of the applicable forms to relieve the payor from potential liability if it emerges that a higher amount should have been withheld based on the payee's actual country of residence.

Forms

NR301 "Declaration of Eligibility for Benefits (Reduced Tax) under a Tax Treaty for a Non-resident Taxpayer"

Part 8. Certification and undertaking

  • I certify that the information given on this form is correct and complete.
  • I certify that I am, or the non-resident taxpayer is, the beneficial owner of all income to which this form relates.
  • I certify that to the best of my knowledge and based on the factual circumstances that I am, or the non-resident taxpayer is, entitled to the benefits of the tax treaty between Canada and the country indicated in part 6 on the income listed in part 7.
  • I undertake to immediately notify whoever I am submitting this form to (whether it is the payer, agent or nominee, CRA, or the partnership or hybrid entity through which the income is derived) of any changes to the information provided on this form.

NR302 Declaration of Eligibility for Benefits (Reduced Tax) under a Tax Treaty for a Partnership with Non-resident Partners"

Look-through treatment to treaty or residence status of partners

Instructions for the partnership declaring benefits

… A foreign partnership that is treated as fiscally transparent under the laws of a foreign country, resulting in the partners paying tax on the partnership's worldwide income, should use Form NR302 to claim treaty benefits that the partners are entitled to. A foreign partnership that elects to be taxed as a corporation on its worldwide income under the laws of a foreign country completes Form NR301 to claim benefits that the corporation itself is entitled to, or Form NR302 to claim benefits that the partners are entitled to, whichever is more beneficial. …

Canadian resident partners

You must obtain from Canadian resident partners a statement of Canadian residency that includes their name, Canadian address, and Canadian tax number,(social insurance number, business number, or trust account number) as proof that they are a Canadian resident. A statement of Canadian residency is a signed and dated certification by the Canadian resident partner that they are resident in Canada for tax purposes. The statement will expire when there is a change in residency of the partner, or three years from the end of the calendar year in which the statement is signed and dated, whichever is earlier.

You must record their name, tax number, and address in Part III of the worksheet. If you do not have a statement of Canadian residency that includes all of the information indicated in the above paragraph, record them in Part II and apply a tax rate of 25% to their partnership allocation. [If the required particulars are obtained, the worksheet indicates that the withholding rate is 0%.]

NR303 "Declaration Of Eligibility For Benefits (Reduced Tax) Under A Tax Treaty For A Hybrid Entity"

Instructions for payers ...

Do not apply a reduced rate of withholding in the following circumstances:

  • the hybrid entity has not provided Form NR303 (including the appropriate worksheet) or equivalent information and you are unsure that the reduced rate applies;
  • the form is incomplete (but see note below); or
  • you have reason to believe that the information provided in this declaration is incorrect or misleading.

Note: The foreign and Canadian tax number fields may be blank because not all non-residents have these tax numbers.

More information on forms NR301, NR302, and NR303

Treatment of trust as beneficial owner

Information for payers and non-resident payees ...

Q4. If there are multiple beneficial owners for a simple trust account, do you need a form on file for each beneficial owner or just for the trust that is registered under its own tax identification number?

A4. Generally, a Canadian trust is a person under the Income Tax Act and under Canada's tax treaties. A non-resident trust would also generally be a person if taxed as a person under the tax rules of the country of residence. In these circumstances we would generally consider the trust to be the beneficial owner of the income and eligible for treaty benefits on the income it receives. If this is the case, the trust would complete Form NR301.