Principal Issues: Where Part XIII tax is withheld from interest payment made by Canadian-resident to non-arm's-length Singapore resident at non-treaty rate of 25% by virtue of Article XXI of Canada-Singapore Income Tax Convention (1980), whether refund of a portion of tax withheld will be made when the income is subsequently remitted to or received in Singapore and included in the computation of income for Singapore tax purposes.
Position: Under consideration.
Reasons: An excess Part XIII tax payment arises when the income is remitted to or received in Singapore and is required to be included in the computation of income under Singapore laws. The excess can only be refunded under subsection 227(6) if written application is made within two years after the end of calendar year in which the Part XIII tax was originally paid. However, we are currently considering whether Article XXI of Canada-Singapore Income Tax Convention provides implicit authority to override the time limitation in subsection 227(6).
2011 Canadian Tax Foundation Conference
November 27-29, 2011
Canada Revenue Agency Round Table Question 4
Article XXI of the Canada-Singapore Income Tax Convention (1977) (the "Singapore Treaty") limits the extent to which Canada is obligated to provide treaty benefits in respect of Canadian-source income derived by a resident of Singapore. If an amount of Canadian-source income is taxable in Singapore, but only to the extent that the income is remitted to or received in Singapore, treaty benefits only apply to the portion of the income remitted to or received in Singapore.
Under Singapore's domestic tax laws, interest earned by a resident of Singapore that is paid into a bank account located outside of Singapore will not be included in the computation of income until such time as the funds are remitted to or brought into Singapore (e.g. when the funds are transferred to a bank account located in Singapore).
Assume that in year 1, Canco, a Canadian-resident corporation, pays interest to a resident of Singapore with whom Canco does not deal at arm's length. Canco pays the interest into a bank account located outside of Singapore. The interest is therefore not taxed in Singapore in the year of the payment. Article XXI of the Singapore Treaty applies and the interest payment is subject to Part XIII withholding tax at a rate of 25%.
Suppose in year 4 the cash is brought into Singapore and is included in the computation of income of the Singapore resident for that year. Will Canada refund part of the tax originally withheld by Canco in year 1 so that the Singapore resident's Canadian tax liability is reduced to reflect the applicable treaty rate? Would the response differ if the cash was remitted to Singapore and included in the Singapore resident's income in year 2?
Response
Where an excess amount of tax has been paid on behalf of a person under Part XIII, subsection 227(6) of the Income Tax Act (Canada) provides that the Minister is required, subject to rights of set-off, to refund the excess amount, provided that written application for the refund is made no later than 2 years after the end of the calendar year in which the excess amount was paid.
In the above example, the excess Part XIII amount does not arise until year 4 when the interest is included in computing the recipient's Singapore income. Consequently, the excess amount cannot be refunded under subsection 227(6) as the deadline for applying for the refund would have expired at the end of year 3. However, we are currently considering whether Article XXI implicitly authorizes the refund of the excess Part XIII withholdings in such circumstances. We expect to provide our views in the near future.
If the interest income was instead remitted to or received in Singapore in year 2, the Singapore resident could apply for the refund of the excess amount before the end of year 3. Provided that the application was made before the end of year 3 and the recipient could demonstrate that the interest income was included in the computation of income for Singapore tax purposes in year 2, the excess amount could be refunded pursuant to subsection 227(6).
Jackson MacGillivray
2011-042591