Dear Sirs:
Re: Subparagraph 212(1)(b)(vii)
This is in reply to your letter dated August 1, 1991.
We are of the view that our letter to you dated July 22, 1991 clearly describes the general application of subparagraph 212(1)(b)(vii) in respect of the type of situation referred to therein. However, the following additional comments elaborate upon our position on this matter and hopefully are of assistance to you:
1. As indicated by our letter of July 22, 1991, subparagraph 212(1)(b)(vii) only applies if the debtor may not under any circumstances (subject only to the exceptions set forth in clauses (C), (D) and (E)) be obliged to pay more than 25% of the debt within 5 years from the date of issue of the debt obligation. Accordingly, if there are circumstances, whether or not these circumstances are prevailing at any particular time, under which the debtor may be obliged to pay more than 25% of the debt within 5 years from the date of issue of the debt obligation (other than as provided for under clauses (C), (D) and (E)), interest payable on the debt obligation will not be exempted from taxation under paragraph 212(1)(b) by virtue of subparagraph 212(1)(b)(vii).
2. Generally, the actions of the shareholders of a corporation are not within the control of the corporation. Therefore we do not consider it accurate or appropriate to represent that a corporation is voluntarily repaying a debt when it is obligated to make such repayment by virtue of the terms of the debt obligation which
2. Paragraph 212(1)(c) now (after the 1988 amendment thereto) generally only applies to amounts paid or credited or deemed to have been paid or credited by a trust to a non-resident beneficiary (otherwise than on a distribution or payment of capital) to the extent that such amount would, if the non-resident person were a resident of Canada to whom Part I was applicable, be included in computing the income of the non-resident person by reason of subsection 104(13). Thus, for example, to the extent income for trust law purposes exceeds income for income tax purposes under the Act, such excess will generally not be taxable under paragraph 212(1)(c). We note that paragraph 214(3)(f) of the Act is still in effect and continues to apply.
Our comments above are by necessity of a general nature and are not necessarily applicable to the particular situations you have in mind. Furthermore, our comments are predicated on various assumptions, including that the trust referred to was resident in Canada, that subsection 104(8) was not applicable, that none of the income of the trust was "designated income" for purposes of Part XII.2 and that the trust claimed the maximum deduction permitted under paragraph 104(6)(b).
Yours truly,
Reorganization`s and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch