Principal Issues: Whether a debt is created for the purposes of subsection 15(2) in circumstances where Part XIII tax is assessed in respect of a payment made by a Canadian-resident corporation to a non-resident person, and paid by the Canadian-resident corporation on behalf of the non-resident person under subsection 215(6).
Position: No.
Reasons: Consistent with prior published position.
June 21, 2023
Ms. Marie-Hélène Chouinard Income Tax Rulings Directorate International Issues Advisor International Division International and Large Business Directorate Jean-Bernard Dion Compliance Program Branch Canada Revenue Agency XXXXXXXXXX 2017-072018
Application of 15(2) and 215(6)
This is in response to your request for a technical interpretation wherein you requested our views on the application of subsection 15(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), in respect of an amount of Part XIII tax assessed on a payment made by a Canadian-resident person to a non-resident person, and paid by the Canadian-resident person on behalf of the non-resident person under subsection 215(6) of the Act.
Unless otherwise stated, all references to a statute are to the Act, and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.
FACTS
1. Parentco is a non-resident corporation;
2. Parentco owns all of the shares of Canco, a corporation resident in Canada;
3. Parentco also owns all of the shares of Sisterco, a non-resident corporation;
4. Canco made certain royalty payments to Parentco and Sisterco;
5. Canco has failed to withhold the Part XIII tax in respect of the royalty payments made to Parentco and Sisterco;
6. Part XIII tax was assessed by the Canada Revenue Agency and paid on behalf of Parentco and Sisterco by Canco pursuant to subsection 215(6); and
7. Canco did not recover from Parentco and Sisterco the amount of Part XIII tax paid on their behalf.
8. Canco is connected with Sisterco by virtue of subsection 15(2.1).
QUESTION
You asked for our views as to whether, for the purposes of section 15, a debt between Sisterco (i.e. the debtor) and Canco (i.e. the creditor) would arise from the payment made by Canco on behalf of Sisterco under subsection 215(6).
OUR COMMENTS
In general terms, subsection 215(6) provides that where a person has failed to withhold an amount as required under Part XIII from an amount paid to a non-resident person, that person is liable to pay as tax under Part XIII, on behalf of the non-resident person, the whole of the amount that should have been withheld.
Where a corporation pays, under subsection 215(6), an amount on behalf of a non-resident person and does not subsequently recover the amount from the non-resident person, as expressed in document 2006-0214291I7, for the purposes of section 15, we consider that the corporation conferred a benefit on the non-resident person, the amount of which benefit would generally be included in computing the income of the non-resident person under subsection 15(1), if the non-resident person is a shareholder of the corporation, rather than considering that the non-resident person received a loan from or became indebted to the corporation, the amount of which loan or indebtedness would generally be included in computing the income of the non-resident person under subsection 15(2), if the non-resident person is a shareholder of the corporation or a person connected to such shareholder.
Therefore, having regards to the situation described above, consistent with the position adopted in document 2006-0214291I7, since Canco paid, under subsection 215(6), an amount of Part XIII tax on behalf of Parentco and Sisterco and did not recovered the amount from Parentco and Sisterco, we would consider that, for the purposes of section 15, Canco conferred a benefit on Parentco and Sisterco, rather than considering that Parentco and Sisterco received a loan from or became indebted to Canco.
Consequently, the 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.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We hope that the above comments are helpful to you.
Yves Moreno
Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch