A Canadian resident taxpayer (Canco) enters into a swap agreement with a non-arm’s length non-resident company (NRco). Payments under the swap agreement are made by Canco to NRco annually, whereas NRco makes its payments to Canco quarterly.
Q.60 at the 1984 CTF Roundtable suggests that where, as here, swap payments are not made contemporaneously, withholding tax may apply to a portion of the outbound payments that represents an interest element. Is this still CRA’s position?
CRA responded that in order for withholding tax to apply to the interest component of a swap payment, the legal character of the amount made by Canco to NRco must be recharacterized as interest for tax purposes. In light of the principle in Shell Canada (that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected), generally, withholding tax would not apply in this situation absent a finding of sham or the application of specific provision such as s. 245 or 247.