6 March 1996 External T.I. 9412285 - WITHHODING TAX ON INTEREST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

									941228
XXXXXXXXXX							Tim Kuss

Attention: XXXXXXXXXX

March 6, 1996

Dear Sirs:

Re: Non-Resident Withholding Tax

We are writing in reply to your letters dated May 3, 1994 and November 14, 1995 requesting a technical interpretation regarding the application of paragraph 212(1)(b) to the following hypothetical situation. We apologize for the delay in responding.

• A corporation resident in Canada ("Canco") has a wholly owned U.S. foreign affiliate ("USco"). Canco has no permanent establishment in the U.S. and USco has no permanent establishment in Canada.
• On April 1 USco acquires from Canco a $1,000,000 Government of Canada 90 day T-bill due on June 30 for fair market value consideration of $990,000.
• On April 20 USco sells the T-bill back to Canco for fair market value consideration of $993,500.
• On June 30 (maturity date) Canco holds the T-bill and the Government of Canada pays $1,000,000 to Canco on the T-bill.

Analysis and Discussion

Where a non-resident holds an obligation that has been issued by a person resident in Canada and the non-resident assigns that obligation to a person resident in Canada the provisions of subsections 214(6), (7), (7.1) and (8) generally come into play.

Government of Canada treasury bills are obligations guaranteed by the Government of Canada and are therefore obligations described in subclause 212(1)(b)(ii)(C)(I). These obligations would satisfy the conditions in paragraph 214(8)(a) and be considered "excluded obligations" for purposes of subsection 214(7).

Subsection 214(7.1) generally applies where a person resident in Canada has assigned an obligation to a non-resident and that non-resident has subsequently assigned the obligation back to the person resident in Canada. However, one of the conditions for the application of subsection 214(7.1) is that subsection 214(6) or (7) would apply with respect to the assignment if those subsections were read without reference to paragraphs 6(c) and 7(c). In the above circumstances, if those subsections were read without reference to paragraphs 6(c) and 7(c) the subsections would still not apply to the assignment by USco described above, as the obligation does not satisfy the conditions in paragraph 214(6)(b) or 214(7)(b). Therefore none of subsections 214(6), (7) or (7.1) apply to the above assignment and no withholding tax would be payable as a result of the assignment.

Additional Comments

The specific facts and circumstances of a particular case would have to be examined thoroughly to determine whether any of an affiliate's income resulting from such assignments would be considered foreign accrual property income. Consideration would be given to, among other things, the definition of "investment business" in subsection 95(1) and the provisions of paragraphs 95(2)(a.1), 95(2)(a.3) and 95(2)(l) and subsections 95(2.3) and 95(2.4).

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch