Principal Issues: What is the procedure to get a refund of withholding tax under Part XIII that has been made on interest payments when a part of the interest payments are re-characterized, pursuant to the application of subsections 18(4) and 214(16), as deemed dividends for the purposes of Part XIII and the withholding tax rate under the applicable treaty is lower on dividends.
Position: Minister must refund the taxpayer on written application made by the taxpayer not later than 2 years following the end of the calendar year during which the excess withholding tax was paid.
Reasons: Application of the ITA.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 1
Recovery of withholding tax following application of s. 18(4)
A corporation with a taxation year end on June 30 must pay interest on a loan to its non-resident parent monthly. A withholding tax is applied and remitted to the Canada Revenue Agency ("CRA") each month. When filing the corporation's returns, the corporation realizes that subsection 18(4) of the Income Tax Act (footnote 1) ensures that an amount of interest is not deductible and becomes a deemed dividend. On application of the tax treaty, the withholding tax rate is lower, so that the company made overpayments.
Form NR7-R, "Application for Refund Part XIII Tax Withheld" (footnote 2), allows the recovery of overpayments, but it can only be filed on a calendar year basis.
Question to the CRA
What is the procedure for recovering excess withholding taxes in this type of situation?
CRA Response
Subsection 227(6) provides that where a person on whose behalf an amount has been paid under inter alia Part XIII to the Receiver General, and where the amount so paid is in excess of the amount that the person was liable to pay, the Minister shall, on written application made no later than two years after the end of the calendar year in which the amount was paid, pay to the person the amount for which the person was not liable to pay. On the other hand, if the person is or is about to become liable to make a payment to Her Majesty in right of Canada, the Minister may apply the amount otherwise payable under subsection 227(6) to that liability and notify the person of that action. That application can be made using form NR7-R.
Where a corporation resident in Canada is denied a deduction of interest by virtue of subsection 18(4), paragraph 214(16)(a) deems each non-deductible amount of what otherwise would be an amount of interest paid or credited by the corporation to non-residents to be a dividend and not to be interest for the purposes of Part XIII.
However, paragraph 214(16)(b) allows the corporation to designate, in its return of income under Part I for the year, which amounts paid or credited as interest to the non-resident person in the year are deemed to have been paid as dividends and not as interest, up to the aggregate amount of interest payments to such non-resident that are otherwise deemed to be dividends under paragraph 214(16)(a). Paragraph 214(16)(b) therefore allows the corporation to determine the timing of payment of deemed dividends for purposes of Part XIII, allowing for flexibility and certainty with respect to the corporation’s withholding and payment obligations in respect of the amounts of such deemed dividends during a taxation year.
Thus, in the situation presented, by virtue of the application of paragraph 214(16)(a) and any designation under paragraph 214(16)(b), the non-resident parent could therefore file, no later than two years after the end of each calendar year in which overpayments were made to the Receiver General, a Form NR7-R to recover these amounts, unless these amounts are applied, as indicated above, against amounts owing to or about to become due to Her Majesty in Right of Canada.
Hugo Gravel
Nicolas Bilodeau
October 5, 2018
2018-076872
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 R.S.C., 1985, c. 1 (5th Supp.)
2 CANADA REVENUE AGENCY, Form NR7-R, “Application for Refund Part XIII Tax Withheld”, 31 October 2017.