7 May 2004 IFA Roundtable Q. 1, 2004-0072131C6 - IFA Round Table 2004 Q.1 - 212(13.1)(a) -- summary under Article 11

In the context of a "tower" structure, a partnership of which two taxable Canadian corporations are the partners borrows money from a U.S. financial institution in order to acquire an interest in a U.S. limited liability company. The Directorate indicated that in a recent tax ruling request, the CRA had concluded in light of the foreign law applicable to such a partnership, the provisions of the partnership agreement and the terms and conditions of the loan agreement between the partnership and the U.S. lender that the partners of the partnership were considered to be the payers of the interest on the loan, with the result that such interest was not exempt from withholding tax as the loan did not qualify under s. 212(1)(b)(vii). CRA indicated that Article XI, para. 6 of the Canada-U.S. Convention would apply to deem the interest to arise in Canada and that generally the second sentence of para. 6 of Article XI would not apply to re-source such interest to the U.S. unless the CRA was convinced that (i) investing in the interest in a wholly-owned subsidiary (i.e., the LLC in this case) of the partnership constituted a business carried on by it through a permanent establishment in the U.S. (which would not normally be the case where the partnership was merely holding shares or interests in a wholly-owned subsidiary), (ii) the loan was incurred in connection with such permanent establishment and (iii) the interest paid on the loan was borne by such permanent establishment.