P.K. Tang 995-1787
October 28, 1983
Dear Sirs:
Re: Technical Interpretation of Section 126 of the Income Tax Act (the "Act")
This is in reply to your letter of October 4, 1983 wherein you request our interpretation on the meaning of the phrase "non-business-income tax paid by him for the year" as used in paragraph 126(1) (a) of the Act. Specifically you provide us with the following hypothetical situation:
A Canadian company loans funds to its U.S. subsidiary at interest. The terms of the agreement provide that interest will only be paid in one lump sum at the end of the third year. It is your understanding that the U.S. withholding taxes would be exigible only in the year in which the interest is paid as under the terms of the note the Canadian company is not entitled to enforce payment prior to that date. The Canadian company will accrue the interest annually and report the accrued interest as income for Canadian tax purposes.
It is your contention that the withholding taxes paid at the end of year 3 will qualify as a "non-business-income tax-paid by the company for "that" year", i.e., the year in which year 3 of the debt expires as that is the assessable year for U.S. tax purposes.
It is our view that for purposes of paragraph 126(1)(a) of the Income Tax Act the amount of any tax eligible in a taxation year is the amount of the non-business-income tax paid by the taxpayer in respect of the income of the taxation year in which the income is included even though part or all of the tax may be paid before of after that year. In this regard please note the comments in Interpretation Bulletin IT-270 at paragraphs 6 and 7, noting in particular the comments on the four year statute of limitations and the obtaining of a waiver.
Hence, in the situation described, it is our view that even though all of the withholding taxes are paid at the end of year 3. These taxes are paid for the income of all those years. Accordingly, they should be applied to the respective years in which the related income is included.
We trust the above will be of assistance to you.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch