Canada: Back-To-Back Loans And The 5/25 Withholding Tax Exemption

Last Updated: January 27 2005

Article by Kathleen Penny

© 2004 Blake, Cassels & Graydon LLP

This article was originally published in Blakes Bulletin on Cross Border Taxation - November 2004

The Canada Revenue Agency (CRA) has recently issued an administrative income tax ruling which expands the possible application of the "5/25" Canadian withholding tax exemption for interest paid by Canadian corporate borrowers, by blessing for the second time a back-to-back loan arrangement. The ruling confirms that the general anti-avoidance rule (GAAR) would not be applied to deny the exemption in the circumstances presented.

Withholding Tax Exemption for Corporate Debt

The 5/25 withholding tax exemption generally applies when a Canadian resident corporation becomes indebted to a non-resident with which it deals at arm’s length, provided that the debtor cannot under any circumstances be obligated to repay more than 25% of the principal amount in the first five years after the date the debt is issued. An exception to the 25% limitation is made if there is an event of failure or default or illegality, in which case there can be an accelerated obligation to repay the debt in full.

The exemption has also been extended to debtors that are non-resident corporations with Canadian businesses or assets, provided that under Canadian tax law they are deemed to be resident for Canadian withholding tax purposes when they pay interest. Also, the exemption has been extended to partnerships, provided that each and every partner is a Canadian resident corporation or a non-resident corporation deemed to be Canadian resident for withholding tax purposes.

Non-Corporate Borrowers

The exemption is not available if the Canadian debtor is a Canadian resident individual, a Canadian resident trust, or a partnership with one or more non-corporate partners. As a result, the exemption has not been available in a number of common situations in which Canadian entities may have wished to borrow from a non-resident of Canada. Because individuals do not qualify, the exemption is not available for personal mortgage loans. The exemption is not available for a loan to a trust, such as a Canadian REIT or securitization vehicle, even if the trust has a corporate trustee. This is because a trust is deemed to be an individual for Canadian tax purposes. Many partnerships used for Canadian real estate investment and other activities have individuals as partners, so the withholding tax exemption is not available for partnership debt held by a non-resident.

Back-to-Back Loans

The CRA had in the past frowned upon suggestions that the withholding tax exemption might be available where a Canadian corporation borrows from a non-resident on terms that would technically qualify for the exemption, and then on-lends to an entity that would not qualify to access the withholding tax exemption. If the Canadian corporation were properly characterised as an agent or nominee for the ultimate borrower, this would result in a failure to qualify for the exemption. Even if the Canadian corporation acted as principal to borrow and on-lend, the CRA’s position was that GAAR may apply to deny the exemption. This depended on the facts, and in particular whether the primary purpose for the loan to the Canadian corporation was to obtain the withholding tax exemption. If this were the primary purpose, there would be an "avoidance transaction". In addition, the position was that the loan to the Canadian corporation may be considered a misuse or abuse of the withholding tax exemption, and in that case GAAR would apply to deny the exemption.

CRA’s Latest Ruling

The recently released tax ruling appears to be the second publicly-disclosed ruling granted by the CRA which confirms that GAAR would not be applied to deny the withholding tax exemption in the case of back-to-back loans. However, it is the first ruling granted where the corporation that borrowed from a foreign lender, and loaned funds to an ultimate borrower that did not itself qualify for the exemption, was a special purpose vehicle newly formed to participate in the back-to-back loan transactions.

A favourable GAAR ruling was granted. Key to the finding that GAAR did not apply were several factual statements made by the taxpayer in the ruling request, regarding the reasons for structuring the transaction in this manner.

One of the key representations made was that debt could not be raised for the securitization trust from Canadian financial institutions on terms and conditions at least as favourable as those under the proposed loan from the foreign lender. It was also not an alternative for the Canadian corporation sponsoring the securitization trust to borrow from the foreign lender, because the lender would consider the credit risk of the entire business of the corporation, unlike the securitization trust where credit risk was isolated. (Query whether the CRA was viewing the transactions as a form of indirect financing for this Canadian corporation, rather than financing for the securitization trust.) Lastly, the taxpayer stated that there would be significant costs and delays associated with unwinding the securitization transactions currently being carried out with the trust, and implementing a new securitization platform.

It will be interesting to see whether the CRA will extend the same treatment to other types of trusts (including REITs), partnerships and the like. Presumably it will always be the case that the terms and conditions of the loan from the foreign lender would be more favourable than would be obtained from Canadian financial institutions (otherwise there would be no commercial reason to favour the foreign lender). It will presumably also always be the case that there are valid existing reasons for the non-corporate structure of the borrower, and likely also adverse consequences of restructuring into a corporate structure. Nevertheless, a GAAR ruling is always dependent on all of the facts and circumstances.

The Canadian case law regarding the interpretation of GAAR, including the interpretation of the definition of "avoidance transaction" and what constitutes a "misuse" or "abuse" of the Canadian Income Tax Act is still developing. We are still awaiting the first case on GAAR to be heard by the Supreme Court of Canada. The approach of the courts in the future will presumably affect both the rulings practices of the CRA and the comfort level of Canadian borrowers in carrying out withholding tax planning of the type discussed above.

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.

Events from this Firm
22 Nov 2017, Seminar, Toronto, Canada

Join members of the Blakes Environmental group for a discussion of hot topics and trends in Canadian environmental law. In a “quick hits” format with time for discussion, our panellists will speak on a variety of cutting-edge issues.

22 Nov 2017, Seminar, Toronto, Canada

Mental illness is becoming the leading cause of disability globally, yet it remains cloaked in secrecy, shame and misunderstanding. This presentation discusses the reality and impact of mental illness in our lives as well as models of understanding and intervention. The goal is both to raise literacy as well as change culture in a way that leads to better lives for the many affected Canadians and their families.

24 Nov 2017, Seminar, Toronto, Canada

Blakes is proud to host our New to In-House Series, designed to bring together junior and mid-level in-house counsel for a candid exchange of insights to highlight and address some of the challenges and opportunities facing in-house lawyers in their roles today.

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.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


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.