On December 14, 2007, amendments to the Income Tax
Act (Canada) were enacted into law that will eliminate
Canadian withholding tax on conventional interest payments made
to arm's length non-residents of Canada beginning in the
new year. In the March 2007 federal budget, the government
announced that withholding taxes in respect of interest
payments made to arm's length non-residents would be
eliminated shortly after the entry into force of the Fifth
Protocol to the Canada-US Income Tax Convention (For further
information on this aspect of the Fifth Protocol, please see
our previous bulletin entitled "
Withholding Tax on Cross-Border Payments"). However,
with the enactment of Bill C-28, Canadian withholding tax will
no longer generally apply to conventional (e.g.,
non-participating) interest payments made to arm's length
non-residents on or after January 1, 2008.
Under the Income Tax Act (Canada), non-resident
lenders are generally subject to a withholding tax of 25% on
the gross amount of interest they collect from Canadian
resident borrowers. However, this withholding tax is generally
reduced to a rate of 10% for non-resident lenders that are
entitled to the benefits of an income tax treaty. The law
requires the Canadian borrower to withhold any such tax from
payments made to the lender and remit the tax to the Canada
Benefits Of The Statutory Change
The accelerated elimination of withholding tax on interest
payments is a welcome development for both non-resident lenders
and Canadian borrowers. Canadian borrowers will particularly
benefit where a withholding tax exemption would not otherwise
have been available because they will no longer face demands to
"gross-up" interest payments to compensate for the
imposition of withholding tax. Even if a withholding tax
exemption, such as the exemption on certain long-term loans,
was otherwise available, the new statutory changes will reduce
transaction costs as the need for additional documentation and
structuring to fit within an applicable withholding tax
exemption has largely been eliminated.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
Recently, I was contacted by a small business owner who had an unpleasant conversation with a CRA collections officer about an outstanding GST/HST assessment against his small company (of which he was a director).
Budget 2016 declared that the new Liberal government would ‘protect the integrity of Canada's international tax system' by introducing new tax measures to prevent unintended, tax-free cross-border distributions of capital to non-residents by narrowing the application of an existing exception to the cross-border anti-surplus-stripping rule.
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