2015-0599161I7 Subsection 18(4) and section 216

Principal Issues: Does subsection 18(4) apply to the non-resident corporations filing a section 216 return for their taxation years starting before 2014?

Position: Yes.

Reasons: Pursuant to subsection 216(1), such corporations calculate Part I tax as though the non-resident person were a person resident in Canada.

Author: Agarwal, Lata
Section: 18(4), 216

                                                                            September 11, 2015

David Paradis                                                      HEADQUARTERS
Senior Technical Specialist                                  Income Tax Rulings
Legislative Applications Section                               Directorate
International & Large Business Directorate         Lata Agarwal, CPA,
Compliance Programs Branch                            CMA, MBA

                                                                            2015-059916

Subject: Application of the thin capitalization rules to the non-resident corporations

We are writing in response to your email of July 17, 2015, in which you requested our opinion on the application of the thin capitalization rules under subsection 18(4) (the “Rules”) of the Income Tax Act (the “Act”) to a non-resident corporation (the “Taxpayer”) who filed a return under section 216 of the Act for its 2013-2014 taxation year. We are confirming the comments that we provided to you during a phone conversation (Agarwal/Paradis) on August 4, 2015. 

In brief, in light of the amendments to the Rules (the “Amendments”) in 2013, the Taxpayer is disputing the applicability of the Rules to a non-resident corporation that files a section 216 return for a taxation year that began before 2014. The Taxpayer is taking the position that the Amendments revised the legislation to specifically extend its scope to such corporations and that the Rules do not apply to these corporations before the effective date of the Amendments. This view is contrary to the CRA’s position in E9638945 that stated that the Rules applied to taxpayers that file a return pursuant to section 216.

You have asked us to confirm your view that the Rules, before the Amendments, applied to corporations filing a return under section 216 because these corporations are deemed to be a resident of Canada for the purposes of section 216.

Our comments

Where a non-resident person elects to file a return of income under section 216, the person becomes liable for Part I tax on the income in question “as though the non-resident person were a person resident in Canada.” Therefore, provisions that could apply to calculate the Part I tax of a Canadian resident, including subsection 18(4), will also apply to any non-resident who makes an election under subsection 216(1). There was nothing in the Amendments to indicate that the Rules only apply to such corporations from the effective date of the Amendments, i.e., to taxation years that begin after 2013. Rather, the Amendments provide a specific formula for computing the equity amounts of such corporations for the purposes of applying the Rules. In summary, we agree with your view that the Rules apply to the Taxpayer’s interest expense claimed in its 2013-2014 taxation year.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’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 trust that these comments will be of assistance. If you would like to discuss the matter further, please contact Lata Agarwal or me.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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