Subsection 212(1)

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.

In response to questions as to how a Canadian corporation may recover Part XIII tax that it has withheld on a dividend cheque issued to a US resident that then is returned (or where there is uncertainty that the payee is a US resident), CRA responded that this was a question that could be specifically addressed with a more complete set of facts, and confirmed its position in IC 77-16R4, May 11, 1992 (Archived), on “credited”:

5. The words "credits" and "credited" cover any situation where a resident of Canada or, in certain cases, a non-resident (see 8 below) has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident such as where (a) a tenant or agent deposits rents in a bank account on behalf of a non-resident landlord; (b) a bank credits interest to the savings account of a non-resident; (c) an insurance or trust company deposits a pension or annuity payment in the bank account of a non-resident; or (d) the amount due is applied by the resident (or deemed resident) against an amount owing by the non-resident. …

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.

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.

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… .

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.

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.

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.

"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.

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'".

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.

"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."

"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."

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.

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.