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QUESTION 28
Non-Resident Withholding Tax
Subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act") contains no provision like subsection 18(6) of the Act that deals with back-to-back loans. Therefore is an exemption from withholding tax available when a non-resident deposits funds with a non-resident financial institution that in turn loans funds to a Canadian corporation with which the non-resident individual does not deal at arm's length?
Revenue Canada's Position
Subparagraph 212(1)(b)(vii) of the Act is clearly intended to exempt from withholding tax only interest payable to a non-resident person with whom the borrower is dealing at arm's length. The deposit of funds by the non-resident with the non-resident financial institution could constitute an avoidance transaction within the meaning of paragraph 245(3)(b) of the Act. Assuming that it is an avoidance transaction, it would be considered to be a misuse of subparagraph 212(1)(b)(vii) of the Act and, for that reason, would be subject to subsection 245(2) of the Act.
Prepared by: H. Woolley
August 28, 1991