Canco was assessed for and paid Part XIII tax regarding royalty payments that it made to its non-resident parent (Parentco) and to a non-resident subsidiary of Parentco (Sisterco), and did not seek to recover that tax from them. Should s. 15(2) be applied on the basis of each non-resident owing it for the applicable tax?
CRA adverted to 2006-0214291I7, which effectively indicated that the unrecovered payment of Parentco’s Part XIII tax constituted a taxable benefit subject to ss. 15(1) and 214(3)(a), but that ss. 56(2) and 214(3)(a) did not apply to the unrecovered payment of Sisterco’s Part XIII tax because such payment would not be included in the non-resident’s shareholder’s income if Part I were applicable to it. The Directorate then found that Canco conferred a benefit on Parentco and Sisterco rather than Parentco and Sisterco having become indebted to Canco.
In the case of Parentco, this implied a taxable benefit pursuant to ss. 15(1) and 214(3)(a). However:
[T]he amount of Part XIII tax paid by Canco on behalf of Sisterco would not be included in computing the income of Sisterco under subsections 15(1) or (2) because, respectively, on the one hand, Sisterco is not a shareholder of Canco and, on the other hand, Sisterco would not be considered to a have received a loan from or become indebted to Canco.