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.
Part I of this series of articles reviewed some of the basic tax requirements for using trusts to split income, and Part II discussed a number of tax planning opportunities that can be accessible through the use of inter vivos trusts.
Based on a host of recently enacted legislation attacking the use of offshore trusts by
Canadians, eliminating immigration trusts, severely restricting testamentary trust tax
benefits, generally attempting to eliminate inter-provincial testamentary tax planning
opportunities, and so on, it seems safe to say that the federal government views the
use of trusts in Canada dimly these days.
Part I of this series of articles reviewed some of the basic tax requirements for using trusts to split income. In the second instalment of the series we will review some common income splitting opportunities that are accessible through the use of trusts.