Subsection 214(1) - No deductions
Administrative Policy
93 C.P.T.J. - Q.27
Royalties earned by non-residents not carrying on business in Canada from Canadian resource properties are subject to withholding tax under s. 212(1)(d) on the gross amount of the royalties before any deduction in respect of Crown charges.
Subsection 214(3) - Deemed payments
Paragraph 214(3)(a)
Cases
Gillette Canada Inc. v. The Queen, 2001 DTC 895, Docket: 1999-746-IT-G (TCC)
The taxpayer (a Canadian subsidiary of a U.S. corporation ("Gillette Boston")) contributed a 9.9% interest in a French partnership that was 90% owned by Gillette Boston, to a French subsidiary ("Oral B France") in consideration for shares. The partnership repurchased the partnership interest held by Oral B France in exchange for a note, Oral B France repurchased the shares in its capital held by the taxpayer in exchange for an assignment of the note, and the note was converted into a loan with the loan not being repaid until almost five years later.
Rip T.C.J. found that s. 214(3)(a) did not apply to deem there to be a payment in respect of the loan owing to the taxpayer because s. 214(3)(a) did not apply to amounts owing by a partnership.
See Also
Minet Inc. v. The Queen, 96 DTC 1405 (TCC)
O'Connor TCJ. accepted the taxpayer's submission that ss.214(3)(a) and 56(2) could not be applied to impose Part XIII tax where a Canadian resident conferred a benefit on a non-resident person. The "taxpayer" referred to in s. 214(3)(a) is a non-resident.
Florsheim Inc. v. The Queen, 95 DTC 110 (TCC)
The taxpayer was subject to liability for Part XIII tax pursuant to ss.80.4(2), 15(9), 214(3)(a), 215(6) and 227(10.1) in respect of interest-free loans made by it to its U.S.-resident parent notwithstanding submissions to the effect that ss.214(3) and (3.1) were too vaguely worded to accomplish this result.
Industries P.W.I. Inc. v. MNR, 93 DTC 852 (TCC)
An interest-free loan made by the taxpayer to a non-resident corporate shareholder was subject to Part XIII tax. The taxpayer unsuccessfully argued that the phrase "if Part I were applicable" should be interpreted as indicating that the non-resident corporation should be treated as a resident Canadian corporation for purposes of considering the rules in s. 15(2).
Administrative Policy
19 October 2012 T.I. 2012-0440071E5 - Section 67 of the Income Tax Act
Where a taxpayer pays an intercompany management fee or similar charge and CRA reduces the amount of the deduction under s. 67 ("perhaps on the basis of a different interpretation of reasonableness"), CRA stated that it would allow a written request from the recipient to make a corresponding reduction in the recipient's income, provided that the recipient refund that amount to the taxpayer.
Where the recipient resides in a treaty country:
[C]ompetent authority assistance may be requested to negotiate offsetting or corresponding adjustments in order to relieve the double taxation. In the case where the unreasonable or excess amount would also give rise to non-resident tax under Part XIII as a deemed dividend pursuant to paragraph 214(3)(a), the taxpayer is provided the option of repatriating the amount that has been disallowed in order to avoid the non-resident tax.
19 November 1999 TI 973234
Where a Canadian partnership makes a loan to the U.S. parent of a wholly-owned Canadian resident corporation ("Canco") which is a member of the partnership, the rate of withholding will be 15% as the dividend is not deemed to have been paid by the particular corporation that is a member of the partnership and, therefore, it cannot be said the U.S. parent owns at least 10% of the voting stock of the company paying the dividend.
IT-119R4, para. 38
"Debts of Shareholders and Certain Persons Connected with Shareholders", 7 August 1998.
....If there is no series of loans or other transactions and repayments (see ¶ 28 above), the non-resident who has received a loan in a particular taxation year cannot be deemed to have received a dividend until one year after the end of the taxation year of the lender, in order to determine if the exception under subsection 15(2.6) applies. Consequently, it is the Department's practice, in these circumstances, not to levy a penalty and not to charge interest in respect of the requirement for remittance of the tax, provided that the tax is remitted on or before the 15th day of the 13th month following the end of the taxation year of the lender in which the loan was made (if the tax is not remitted by this day, interest will start accruing as of the 16th day of the 13th month).
Subsection 214(7) - Sale of obligation
Administrative Policy
14 January 2011 T.I. 2004-009860
A foreign currency debt obligation must, pursuant to s. 261(2), be converted to Canadian currency for the purposes of determining "the price for which the obligation was transferred" and "the price for which the obligation was issued" under s. 214(7). The conversions must use the relevant spot rate for the day of transfer and issue, respectively. Therefore, an increase in the Canadian dollar value of the other currency between those two days can lead to a deemed interest payment under s. 214(7) if the obligation is not an excluded obligation.
1 May 2009 IFA Roundtable Q. 12, 2009-0320231C6
Traditional convertible debentures are: unsecured subordinated of a public corporation issued in Canadian dollars for their face value; bear interest (payable at least annually) at a fixed rate; provide a fixed conversion price (or ratio) in excess of the current market price on the issue date; and are redeemable by the issuer at the face value, plus accrued and unpaid interest, on the specified maturity date. CRA stated:
Where there is a conversion of a traditional convertible debenture by its original holder for common shares of the issuer, … in general there would be no Excess under subsection 214(7)… . Accordingly, no amount is deemed to be a payment of interest by the issuer (person resident in Canada) to the non-resident person for the purposes of Part XIII. For the purpose of paragraph 214(7)(d) of the ITA, the price for which the traditional convertible debenture is assigned on the conversion, is the amount determined by multiplying the fixed conversion price by the number of shares received on the conversion, that is, an amount corresponding to the face value of the traditional convertible debenture.
Income Tax Technical News, No. 41, 23 December 2009 Under "Convertible Debt", Q. 2
The amount considered to be repaid on the conversion of a convertible debenture generally will be the stated capital of the shares issued.
If a particular premium on a convertible debt obligation represented participating debt interest, all interest on the obligation would be participating debt interest under an initial analysis of the CRA.
88 C.R. - "Finance and Leasing" - "Interest" - "Amounts Paid on Redemption of Bonds or Purchase of Bonds in the Open Market"
The purchase on the open market by the issuer of a bond held by a non-resident is deemed to be a payment of interest subject to the provisions of s. 212(1)(b) unless it is an excluded obligation.
Articles
David W. Ross, "Convertible Debentures - Principal Amount", Resource Sector Taxation, (2006) Vol. IV, No. 2, p. 280.
Subsection 214(7.1) - Idem [Sale of obligation]
Articles
Broadhurst, "Financing by Non-Residents", 1992 Corporate Management Tax Conference Report, p. 9:19
In the writer's view, s. 214(7.1) does not apply to a non-resident who purchases trade receivables from a Canadian vendor, then resells the trade receivables back to the Canadian resident.
Subsection 214(8)
Paragraph 214(8)(a)
Administrative Policy
88 C.R. - "Finance and Leasing" - "Withholding Tax"
Finance recognizes the anomaly that, unlike the s. 212(1)(b)(vii) exemption, the definition of excluded obligation does not recognize supervening illegality clauses.
Paragraph 214(8)(c)
Administrative Policy
26 November 2013 Annual CTF Roundtable Q. , 2013-0509061C6
CRA is not inclined at this time to take the position that standard convertible debentures would in general constitute "excluded debt obligations" pursuant to paragraph 214(8)(c) of the ITA. …In any event, the application of paragraph 214(8)(c) of the ITA in the context of standard convertible debentures becomes academic when the excess determined under subsection 214(7) of the ITA does not constitute "participating debt interest" and the issuer and holders of the convertible debentures deal at arm's length.
14 January 2011 T.I. 2004-009860
In our view, pursuant to subsection 261(2) of the Act, the discount and yield tests set out in paragraph 214(8)(c) of the Act for a non-convertible, non-exchangeable, foreign currency denominated obligation are to be carried out by converting each of 'the amount for which the obligation was issued' and the 'principal amount' into Canadian currency using the relevant spot rate for the day of issue. Therefore, in our view, fluctuation in the value of a foreign currency affecting the Canadian dollar value of [the obligation], originally issued without a discount, would not result in the obligation being an excluded obligation under paragraph 214(8)(c) of the Act.
Income Tax Technical News, No. 41, 23 December 2009 Under "Convertible Debt"
"The sole fact that the fair market value of the shares issued on conversion exceeds the issue price of the convertible debt obligation is not, per se, determinative, where the issuer must repay the obligation for an amount equal to the issue price."
13 December 1995 T.I. 953013 (C.T.O. "Meaning of 'Excluded Obligation'")
A demand interest-bearing promissory note would qualify as an excluded obligation because it was not issued at a discount.
Articles
Julie Colden, "Implications of Imperial Oil", Canadian Current Tax, Vol. 15, No. 3, December 2004, p. 21.
Subsection 214(15) - Standby charges and guarantee fees
Cases
The Queen v. Melford Developments Inc., 82 DTC 6281, [1982] CTC 330, [1982] 2 S.C.R. 504
In the absence of this provision, "interest" in Part XIII would refer primarily to "the payment of rent by a borrower for the use of the principal of the lender to whom the rent is paid". However, in the absence of the overriding effect of any Convention, the effect of s. 214(15) is to convert guarantee fees into "interest" for the purpose of the withholding tax provisions of that Part.
Administrative Policy
14 January 2011 T.I. 2004-009860
A foreign currency debt obligation must, pursuant to s. 261(2), be converted to Canadian currency for the purposes of determining "the price for which the obligation was transferred" and "the price for which the obligation was issued" under s. 214(7). The conversions must use the relevant spot rate for the day of transfer and issue, respectively. Therefore, an increase in the Canadian dollar value of the other currency between those two days can lead to a deemed interest payment under s. 214(7) [if the obligation is not an excluded]. [no comments except for addition]
6 May 2003 T.I. 2003-001414
A letter of credit fee paid by the taxpayer to a foreign bank for providing documentary letters of credits in respect of an importation of goods by the taxpayer would not be deemed to be interest.
26 November 1996 T.I. 963464 (C.T.O. "Standby and Funding Fees")
"Where a funding fee is paid in respect of a term loan which satisfies all the requirements of subparagraph 212(1)(b)(vii) of the Act so that the interest on the loan would not be subject to withholding tax, the funding fee is also not subject to withholding tax under Part XIII regardless of whether it is paid at the beginning or the end of the term of the loan."
In the case of revolving loans, standby fees and funding fees that are considered to relate to an exempt loan (i.e., a drawdown that is evidenced by a promissory note and that is not payable for five years) also will be exempt from withholding tax.
90 C.R. - Q.47
When a Canadian corporation borrows funds from an arm's length lender and its non-resident parent guarantees the loan for no consideration, the parent will not be deemed to have been paid interest on the loan because it did not receive consideration for its guarantee. However, if the Canadian corporation's borrowing of funds or the giving of the guarantee can be considered to be part of the series of transactions which results in a tax benefit and may reasonably be considered to have been undertaken or arranged primarily to obtain a tax benefit, the transaction nonetheless may be subject to s. 245(2).
88 C.R. - F.Q.25
A guarantee fee received by a wholly-owned non-resident subsidiary of the borrower under a s. 212(1)(b)(vii)-exempt loan for guaranteeing the repayment of that loan, will be deemed to be a payment of interest which is not exempt from Part XIII tax.
Articles
Loveland, "Income Tax Impediments to Foreign Investment in Canada", 1982 Conference Report, p. 666 at pp. 690-693.
Subsection 214(16) - Deemed dividends
Administrative Policy
23 May 2013 IFA Round Table Q. 7
Where a portion of the interest payable by Canadian subsidiary (Canco) on loans from its US Parent and a UK sister company is denied under the thin capitalization rules and deemed to be a dividend, can Canco allocate the deemed dividend first to US-Co (subject to 5% dividend withholding) rather than to UK-Co (a 15% rate)?
Response
S. 214(16)(b) allows the corporation resident in Canada to designate all or a portion of each specific interest payment to a particular non-resident as a dividend, to the extent of the total amount of the interest payments to that non-resident that were otherwise deemed to be a dividend under s. 214(16)(a), thereby effectively allowing the corporation to determine the timing of the deemed dividends for Part XIII purposes. However, the paragraph does not allow the corporation to transfer a deemed dividend from one payee to another, to alter amounts paid to a specified non-resident, or to affect the timing of amounts paid.
Example
Assume that throughout the year, Canco in the above example has $1,000 in paid-up capital and no other equity, and owes $1,000 to US-Co (its parent) bearing interest at 7% (paid as to $35 at the end of each of Q2 and Q4), and owes $1,000 to UK-Co (a sister) bearing interest at 5% ($25 at the end of Q2 and Q4).
$500 (or 25%) of this debt exceeds the thin capitalization limit of 1.5-to-1. Accordingly, 25% of each of the above interest payments would be deemed to be a dividend absent a designation under s. 214(16)(b). If Canco instead designates $17.50 of its fourth quarter US-Co interest payment to be a dividend (i.e., 25% of total US-Co interest of $70), and $12.50 of its fourth quarter UK-Co interest payment to be a dividend (25% of $50), the imposition of Part XIII tax will be deferred to the end of Q4.
Paragraph 214(16)(a)
Articles
Carrie Smit, "Thin Capitalization Amendments – Denied Interest May be Subject to Withholding Tax", CCH, Tax Topics, No. 2114, September 13, 2012, at p. 3.
It should be considered whether loans may be transferred among lenders prior to a particular interest payment (or prior to year end in the case of accrued and unpaid interest), in order to access a lower rate of withholding tax. For example, assume a U.S. company ("USco") owns all the shares of a Canadian company ("Canco"), and USco's wholly owned U.S. subsidiary ("Financeco") has made a loan to Canco. Any denied interest paid to Financeco that is recharacterized as a dividend would be subject to a 15% Canadian withholding tax, as Financeco does not own 10% or more of the voting stock of Canco. However, if Financeco were to transfer the loan to USco prior to the interest payment, the 5% rate may be applicable. [Fn. 9: Neither subsection 214(6) nor (7) should apply to this transfer, as it is a transfer between non-residents.] A transfer of the loan by Financeco to another Canadian corporation before the interest payment may not be beneficial. Draft paragraph 214(17)(b) provides that where a debt is transferred in circumstances where subsection 214(6) or (7) applies to deem a payment of interest, the Canadian corporate debtor is deemed to have paid the unpaid interest to its non-resident creditor immediately before the transfer. [Fn. 10: Draft paragraph 214(17)(b) was not part of the Budget proposals and only applies on or after August 14, 2012.]
Turning to the extension of the thin capitalization rules to debts owing by partnerships:
… a Canadian corporate member of a partnership will be deemed to owe its proportionate share of all partnership debt, and the thin capitalization rules will apply to the extent that such debt is owed to a specified lender in respect of the corporation. If the corporation's thin capitalization limits are exceeded, the corporation will be required to include an amount into income to effectively offset the "tainted" interest deduction.
Where such an income inclusion results, the corresponding interest paid or credited by the partnership is deemed to have been paid by the corporation as a dividend (and not to have been paid by the partnership as interest). Accordingly, it is the Canadian corporation that will have the obligation to withhold and remit the applicable withholding taxes. This can cause practical issues where the Canadian corporation itself has no funds or is only a minority member of the partnership. The partnership may not be aware of the thin capitalization position of its Canadian corporate members and therefore, may not know whether it needs to withhold on its interest payments. If the partnership does withhold on interest in a situation where draft paragraph 214(16)(a) applies, the specified lender will need to apply for a refund of any excess withholding tax.