References in NT 2023-05 to a designated transaction include:
[S]ubsections 212(3.1) to (3.3) help to ensure that withholding tax under Part XIII is not circumvented through the use of back-to-back lending arrangements … . There are also character substitution rules in the Part XIII context. …
A non-resident person (NR1) enters into an arrangement to indirectly provide financing to a taxpayer through another non-resident person (NR2). If interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax. The taxpayer’s income tax reporting reflects, or is expected to reflect, the assumption that the interest it pays in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.
A
What is the scope of the term “financing”?
B
What, if any, role does taxpayer intent/purpose play in determining whether such a transaction is a notifiable transaction?
C
Is there an inherent materiality concept?
D
The public shareholders (including non-residents) of Foreign Parent subscribe for shares of Foreign Parent, which uses those proceeds to (i) make an interest bearing loan to Foreign Opco and (ii) subscribe for shares of (wholly-owned) Foreign Opco, which uses all of such proceeds to make an interest-bearing loan to Canco. Interest paid by Canco to Foreign Opco is subject to a 10% withholding tax rate; whereas the rate would be 15% had the interest been paid by Canco to Foreign Parent. The character substitution rules in s. 212(3.6) do not apply and there are no “specified shares” as defined in s. 212(3.8).
Which parties would be considered NR1 and NR2, respectively, and what are their reporting obligations under subsection 237.4(4)?
A
CRA indicated that, although an “arrangement to provide financing” is not restricted to debt and can include equity financing, the meaning of the phrase is informed by the scope of the back-to-back loan rules in ss. 212(3.1) and (3.2). In general, provided the shares are not specified shares, or shares that involve duplicative character or recharacterization rules, straight equity financing would not have much relevance to these rules.
B
Intent and purpose do not provide a basis for limiting or excusing the reporting obligation, and the objective is largely to allow CRA to collect information to build a picture of what arrangements are being implemented.
C
There is nothing built into the notifiable transaction requirement with respect to materiality. If, for instance, there was a $100 transaction engaging a $100,000 fine, one would anticipate CRA exercising discretion.
D
Here, Foreign Parent is the ultimate funder and Foreign Opco is the immediate funder. Foreign Parent would be required to report pursuant to s. 237.4(4)(a) because it would be considered to be a person to whom a tax benefit results; and Canco and Foreign Opco would be required to report under s. 237.4(4)(b) because they entered into the transaction for the benefit of Foreign Parent.
If Foreign Parent only equity-financed Foreign Opco, the conditions in NT 2023-05 would not be met, because NR2 was not receiving any interest-bearing debt financing; i.e., if NR2 is receiving equity financing through the issuance of shares, and uses all or a portion of the proceeds to make an interest-bearing loan to Canco, the arrangement would not come within the s. 212(3.1) et seq. rules (assuming it is clear that the shares are not specified shares as defined in s. 212(3.8), and do not meet the conditions of the character substitution rules.)