Would "Part XIII withholding tax… apply to amounts of interest and/or principal payments made by a Canadian resident corporate guarantor to a non-resident lender where the original corporate borrower was a non-resident?" CRA responded:
Part XIII withholding tax would apply to the interest portion of the payment by the resident guarantor if the provisions of paragraph 212(1)(b) are met, i.e., if the interest is not fully exempt interest, and is paid or payable to a person with whom the payer is not dealing at arm's length, or is participating debt interest. Furthermore…where interest on the original indebtedness would have met the provisions of paragraph 212(1)(b), the portion of the payment by a resident corporate guarantor retaining the character of interest would meet the provisions of paragraph 212(1)(b) as well.
The corollary is that where interest on the original indebtedness would not have met the provisions of paragraph 212(1)(b), such as if the interest was fully exempt interest, or was not fully exempt interest but was paid to an arm's length recipient.. the portion of the payment by a resident corporate guarantor retaining the character of interest would not meet the provisions of paragraph 212(1)(b) either and therefore Part XIII would not apply.