8 March 2007 Internal T.I. 2006-0214291I7 - Part XIII withholding tax -- summary under Paragraph 214(3)(a)

Where a loan or royalty agreement between a Canadian and a non-resident does not contain a gross-up clause and the Canadian is assessed under s. 215(6) for failure to withhold, the amount of such tax would not be treated as a payment of interest or a royalty for Part I or XIII purposes and, if the non-resident was a shareholder, would give rise to a deemed dividend subject to Part XIII tax pursuant to ss. 15(1) and 214(3). However, if the non-resident was not a shareholder, s. 56(2) could not be applied because the payment of the tax would not have been included in the income of the non-resident if Part I were applicable, so that s. 214(3)(a) would not apply.