Canada: Coupon Strips: An Easy Avoidance Of Withholding Tax No More

In Lehigh Cement Limited v. The Queen, 2010 DTC 2081 (FCA) (Lehigh), the Federal Court of Appeal considered the application of the general anti-avoidance rule (GAAR) contained in section 245 of the Income Tax Act (Canada) (Act) to a coupon stripping transaction used to avoid withholding tax on interest under the former 5/25 rule contained in subsection 212(1)(b) of the Act. Although Lehigh was decided under the 5/25 rule, the decision has broad implications relevant to current law given that non-arm's length interest (subject to a treaty override) remains statutorily subject to withholding tax following the repeal of the 5/25 regime.

The simplified facts in Lehigh involved a group of companies in the business of manufacturing cement, headed by a German public company, Heidelburger Zement. A Canadian subsidiary of the group, Lehigh Cement Limited, was debt financed by an affiliated Belgian group finance company (Finco) with a $140 million term loan (Loan). Finco acquired the Loan in 1994 from a syndicate of Canadian bank lenders and its maturity date was September 15, 2009. In 1994 the Loan carried a floating interest rate tied to the Canadian prime rate. Notwithstanding that the terms of the Loan generally satisfied the exclusion from withholding tax under the 5/25 rule contained in 212(1)(b)(vii) of the Act, it was subject to withholding tax since it was held by a non-arm's length party.

In 1997 and immediately before the coupon strip, the terms of the Loan were amended to provide for a 7% fixed coupon rather than the floating coupon tied to prime. Finco then sold the right to receive the interest payments on the Loan through 2002 to an arm's length bank, Bank Brussels Lambert (BBL), for approximately $42.674 million. The interest paid quarterly on the 7% coupon from Q4 1997 through Q3 2002 aggregated to approximately $49.456 million in undiscounted dollars. Following the sale of the right to interest to BBL, Lehigh Cement paid the full 7% coupon without withholding any amount as may be required under subsection 215(1) of the Act. BBL and Lehigh Cement took the position that interest paid to BBL satisfied the exception to primary liability then provided under subparagraph 212(1)(b)(vii) of the Act.

The Minister of National Revenue reassessed Lehigh Cement on the basis that Part XIII withholding tax was payable (by virtue of the GAAR) in respect of the interest and assessed a corresponding 10% penalty for its failure to withhold the tax. The Minister's sole basis for reassessing Lehigh Cement pursuant to the GAAR was a 1975 budget paper which suggests that the purpose of the 5/25 rule was to facilitate Canadians' access to funds in international capital markets. The Federal Court of Appeal rejected the Minister's invitation to infer from the 1975 budget paper a purpose that limits the literal language of the 5/25 rule because the 1975 budget paper was a "shaky foundation" on which to base a GAAR assessment and held that the Minister did not meet the evidentiary burden as set out in Canada Trustco (2005 DTC 5523 (SCC)). In what is arguably a novel approach to its GAAR analysis, the Court reasoned that it should not infer a purpose from the 1975 budget paper because:

... no trace of the alleged fiscal policy can be discerned or reasonably inferred from subparagraph 212(1)(b)(vii) itself, from the statutory scheme of which subsection 212(1)(b)(vii) is a part, or from any other provision of the Income Tax Act that could possibly be relevant to the textual, contextual and purposive interpretation ... it is fatal to the Crown's misuse argument that it finds no support in any provision of the Income Tax Act, or in any jurisprudence or other authority saying or suggesting that the splitting of the interest and principal obligations of a debt have any income tax implications in relation to subparagraph 212(1)(b)(vii), or any analogous provision or relevant statutory scheme. [emphasis in original]

Since the textual and contextual prongs of the GAAR analysis are those rooted in the statute, the decision in Lehigh may be interpreted as requiring there be at least some positive textual or contextual support for the purported purpose.

The Supreme Court of Canada declined to grant leave to appeal the Federal Court of Appeal decision.

Lehigh is welcome confirmation that the full amount of interest payments following a coupon strip retains its character as interest from the perspective of the payor. This, coupled with the elimination of withholding tax on most interest paid to arm's length non-residents, provides for an easily accessible planning opportunity since transactions such as those undertaken in Lehigh no longer need to comply with the more onerous requirements of the 5/25 regime.

Sensing that this planning to avoid withholding tax on interest could proliferate, the Department of Finance announced draft legislative proposals (Proposals) on March 16, 2011. Pursuant to the Proposals, Part XIII withholding tax will apply to interest paid or credited by a Canadian resident to a non-resident person in respect of a debt that is owed to a person who does not deal at arm's length with the payor. That is, withholding tax will apply unless the Canadian resident payor deals at arm's length with both the holder of the stripped coupons and the residual principal. The Proposals will apply to interest paid or payable after March 16, 2011, other than interest paid in respect of a debt obligation incurred before March 16, 2011 and paid to a recipient that acquired the entitlement to the interest as a consequence of an agreement or other arrangement entered into by the recipient, and evidenced in writing, before March 16, 2011. Interestingly, the explanatory notes which were issued with the Proposals suggest that the Proposals will not apply to interest paid where the entitlement to the principal of the debt obligation is held by a Canadian resident.

As noted above, withholding tax on non-arm's length interest is subject to treaty override, such that the Proposals do not affect, for example, the exemption from withholding tax on interest paid by a Canadian resident to a non-arm's length person who qualifies for relief under the Canada-United States Income Tax Convention (1980), as amended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.