Did you know that cross-border business or investment activities could potentially have both U.S. and Canadian tax implications? The Canada-U.S. Tax Treaty contains information on how tax rates can prove beneficial to people who are subject to taxes in both countries. Here is an example of a Canada-U.S. Tax Treaty Based Ruling for ‘Participating Debt Interest’ investment, examined by the Chartered Professional Accountants at AG Tax.
Please note: This article is a brief summary in response to a petition filed by a U.S. taxpayer to the Canada Revenue Agency (CRA), but is equally applicable to Canadian and U.S. residents.
Background
A U.S. resident, in the CRA Document 2013-0494211I7, asked the CRA if his participating debt interest income (calculated with reference to the index value of oil and gas and paid for by a Canadian corporation who resided in Canada) was subject to a 15% Canadian withholding tax.
Assumptions:
• The Canadian corporation carried on business related to the acquisition, exploration, and development of oil and gas properties in Canada,
• The principle assets of the Canadian corporation consisted of rights to explore and exploit oil and gas; and
• The corporation did not presently own any oil or gas stocks.
What is Participating Debt Interest?
Subsection 212(3) of the Income Tax Act defines Participating Debt Interest as interest (other than certain amounts which are “fully exempt interest”) that is “paid or payable on an obligation, other than a prescribed obligation, all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation”.
CRA’s response
The CRA responded in the affirmative and reasoned that, because the Canadian corporation’s assets included property rights for the purpose of extracting the commodities that made up the index (oil and gas), there was a sufficient link between the index fluctuation (which affects interest) and the increase or decrease in the value of the debtor’s assets. As such, the interest was deemed to arise in Canada, and subjected to the Canadian withholding tax rate of 15%.
Not all tax situations are clearly defined in the Canada-U.S. Treaty. In these situations, a CRA or U.S. Internal Revenue Service (IRS) ruling can prove useful in determining the right tax treatment.
AG Tax can help
If you are a Canadian or U.S. resident who is earning significant interest and/or dividend income which may be subject to treaty based tax rates, require assistance in completing tax forms, or have general queries regarding your unique tax situation, please contact AG Tax.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
