Using funds generated from operations, Opco, which is a foreign affiliate both of its parent (Canco) and grandparent (Can Holdco ), subscribes for equity of Finco (another FA of Canco) which, in turn, makes a non-interest bearing loan to Foreign Sub, which is a direct subsidiary of the parent of Can Holdco (Foreign Parent). As this loan is repaid within two years, s. 90(6) does not apply to the loan. Did the interest-free loan generate Part XIII tax and, if so, who had the obligation to collect and remit the tax – and how could it be collected? The Directorate responded:
[S]ubsection 80.4(2) applies to deem Foreign Sub to have received a benefit in an amount computed based on the prescribed rate. Subsection 15(9) then provides a deeming rule that transforms the subsection 80.4(2) benefit into a shareholder benefit under subsection 15(1). …
If subsection 15(1) could only apply where there was a direct shareholder relationship between the benefit recipient and the benefit conferrer, it would not only render the “connected” concept under subsection 80.4(2) meaningless, but also would imply that the only purpose of subsection 80.4(2) is to provide a formula for the calculation of a subsection 15(1) benefit. …
As the “shareholder” in subsection 15(1), Foreign Sub would be the taxpayer who is deemed to have received the dividend under paragraph 214(3)(a), and it is therefore Foreign Sub who is liable for the withholding tax imposed under subsection 212(2). ...
[T]he person who makes the loan on which the subsection 80.4(2) benefit arises (i.e. Finco) is the person who is required to withhold and remit the Part XIII tax.