Subsection 212(1) - Tax

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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 recognized 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 59

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 126
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) 89
Tax Topics - Income Tax Act - Section 76 103

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 (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

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 498

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.

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 T.I. 961979

"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 Memorandum 952397 (C.T.O. "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'".

October 1995 Memorandum 951626

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 T.I. 950216 (C.T.O. "Systems/Operating 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 T.I. 941807 (C.T.O. "Withholding Tax") and 15 June 1994 T.I. 941096 (C.T.O. "Withholding Tax")

"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 T.I. 940290 (C.T.O. "Withholding 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".

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.

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

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"

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

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