2017-0712731R3 Amount of withholding tax under paragraph 212(1)(b)

Principal Issues: Whether paragraph 3(c) of Article 11 of the UK Tax Treaty applies to reduce the amount of withholding tax to XXXXXXXXXX in respect of the portion of interest paid by Canco to a XXXXXXXXXX partnership that is included in the income of UK resident limited partners of the partnership.

Position: Yes based on the stated Facts.

Reasons: Reading of paragraph 3(c) of Article 11 of the UK Tax Treaty.

Author: XXXXXXXXXX
Section: -

XXXXXXXXXX                                                                                                   2017-071273

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX
        Business number XXXXXXXXXX
        Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above named taxpayer (“Canco”).  We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of Canco, none of the issues involved in this Ruling request:

(i)   is in an earlier return of Canco or a related person;

(ii)  is being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of Canco or a related person;

(iii) is under objection by Canco or a related person;

(iv)  is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(v)   is the subject of a Ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (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.

Our understanding of the facts, proposed transactions, purpose of the proposed transactions, and additional information is as follows:

Definitions

In this letter:

“Canco” means XXXXXXXXXX;

“GP Co” means XXXXXXXXXX, the general partner of each XXXXXXXXXX LP;

“Limited Partners” means the limited partners of each XXXXXXXXXX LP;

“LPA” means the limited partnership agreement of each XXXXXXXXXX LP;

“Particular Interest Payment” means a particular interest payment made by Canco on the XXXXXXXXXX Loans to a particular XXXXXXXXXX LP as described in paragraph 16 under the heading “Proposed Transactions”;

“UK” means the United Kingdom of Great Britain and Northern Ireland;

“UK Limited Partners” means those limited partners of a particular XXXXXXXXXX LP who are resident in the UK for purposes of the UK Tax Treaty;

“XXXXXXXXXX Loans” has the meaning set out in paragraph 12 under the heading “Facts”;

“XXXXXXXXXX LP” means XXXXXXXXXX; and

“UK Tax Treaty” means the Convention between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Gains, as Amended by the Protocols Signed on April 15, 1980, October 16, 1985, May 7, 2003 and July 21, 2014.

Facts

The facts are as follows:

1.    Each XXXXXXXXXX LP is a limited partnership established under the laws of XXXXXXXXXX, and is treated as fiscally transparent for XXXXXXXXXX tax purposes.  Under the applicable LPA, the interests of each XXXXXXXXXX LP are divided into general partnership interests and limited partnership interests.  The income or loss of a particular XXXXXXXXXX LP is generally allocated among its partners in proportion to the respective investment contributions of each partner.

2.    GP Co is a XXXXXXXXXX company that is a resident of XXXXXXXXXX and is a non-resident of Canada for purposes of the Act.  GP Co is the sole general partner of each XXXXXXXXXX LP and holds a general partnership interest representing a XXXXXXXXXX% interest in each XXXXXXXXXX LP.  Under the terms of each LPA, GP Co has sole management authority in respect of each XXXXXXXXXX LP and has full control over the business, assets, conduct and affairs of each XXXXXXXXXX LP.  GP Co has the ability to delegate the management and operation of each XXXXXXXXXX LP to a person permitted to do so, subject to the continued supervision and authority of GP Co.

3.    The Limited Partners collectively hold limited partnership interests representing XXXXXXXXXX% of the interests in the relevant XXXXXXXXXX LP.  The Limited Partners are unrelated investors and each Limited Partner factually deals at arm’s length with every other Limited Partner and with GP Co for purposes of the Act.  No Limited Partner owns (either directly or indirectly and/or together with persons not dealing at arm’s length) XXXXXXXXXX% or more of the limited partnership interests of any XXXXXXXXXX LP.  Under the terms of each LPA, none of the Limited Partners is entitled to participate in the management or control of any of the XXXXXXXXXX LPs.  None of the Limited Partners is permitted to control or acquire any interest in GP Co. Without cause, GP Co may only be removed as the general partner of any XXXXXXXXXX LP by a vote of more than XXXXXXXXXX% of the partners of the relevant XXXXXXXXXX LP.

4.    The Limited Partners include a number of partners that are resident in Canada for purposes of the Act, and a number of partners that are non-residents of Canada for purposes of the Act.

5.    Each Limited Partner factually deals at arm’s length with Canco.

6.    The UK Limited Partners are non-residents of Canada for purposes of the Act.

7.    The Limited Partners are the beneficial owners of their respective partnership interests in the XXXXXXXXXX LPs and of their share of the income of the XXXXXXXXXX LPs.

8.    The XXXXXXXXXX LPs collectively control Canco by virtue of holding, in aggregate, XXXXXXXXXX% of the issued and outstanding common and preferred shares of Canco.  The remaining common and preferred shares of Canco are held by a number of unrelated investors.

9.    None of the XXXXXXXXXX LPs individually holds more than XXXXXXXXXX% of the common or preferred shares of Canco.  The XXXXXXXXXX LPs individually hold common and preferred shares of Canco as follows:

a.    XXXXXXXXXX owns XXXXXXXXXX% of the common and preferred shares of Canco;

b.    XXXXXXXXXX owns XXXXXXXXXX% of the common and preferred shares of Canco;

c.    XXXXXXXXXX owns XXXXXXXXXX% of the common and preferred shares of Canco; and

d.    XXXXXXXXXX owns XXXXXXXXXX% of the common and preferred shares of Canco.

10.   Canco is a taxable Canadian corporation for purposes of the Act as defined in subsection 89(1).  Canco’s tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Tax Centre.  Canco’s address is XXXXXXXXXX.  Canco is a holding company that, through wholly-owned subsidiaries, carries on a XXXXXXXXXX, operating XXXXXXXXXX in Canada and XXXXXXXXXX in XXXXXXXXXX.

11.   None of the Limited Partners is entitled to exercise voting rights in respect of the shares of Canco owned by a particular XXXXXXXXXX LP or own shares of Canco directly.

12.   Each XXXXXXXXXX LP used part of the subscription proceeds from the issuance of its partnership interests to make an interest-bearing loan to Canco (the “XXXXXXXXXX Loans”).  The interest on the XXXXXXXXXX Loans is not “participating debt interest” and is not “fully exempt interest”, as those terms are defined in subsection 212(3).  The XXXXXXXXXX Loans are XXXXXXXXXX, unsecured promissory notes and bear interest at XXXXXXXXXX% per annum.  By the terms of the note indenture, interest on the XXXXXXXXXX Loans is not required to be paid until maturity on XXXXXXXXXX; however, interest is being paid periodically.

13.   Canco also has additional outstanding loans payable directly to certain Canadian-resident and non-resident persons.

14.   Paragraph 2 of Article 27, and paragraphs 4 or 6 of Article 11, of the UK Tax Treaty do not apply to any interest paid by Canco on the XXXXXXXXXX Loans.

15.   Each UK Limited Partner’s share of a Particular Interest Payment will be included in the income of that partner under the income tax laws of the UK.

Proposed Transactions

16.   In XXXXXXXXXX, Canco will pay interest on its outstanding loans, including a Particular Interest Payment to each of the XXXXXXXXXX LPs, such interest being interest that accrued up to the time of the interest payment.

17.   Canco will withhold from its payment of interest the amount of tax required under paragraph 212(1)(b) and remit that amount to the Receiver General on behalf of the non-resident recipient, subject to relief provided by any applicable tax treaty.

Purpose of the Proposed Transactions

18.   The Purpose of the Proposed Transactions is to pay interest on Canco’s outstanding loans.

Additional Information

19.   Each XXXXXXXXXX LP is a partnership for purposes of the Act.

20.   The payment of interest described in paragraph 16 above is in accordance with the terms of the XXXXXXXXXX Loans.

21.   A completed form NR302 will be prepared in respect of each Particular Interest Payment.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, purpose of the proposed transactions, and additional information, and provided further that the proposed transactions are carried out as described above, and the above facts are all the relevant facts at the date of each Particular Interest Payment made by Canco to a particular XXXXXXXXXX LP, our Ruling is as follows:

Canco is not required to deduct, or remit, under subsection 215(1), any amount of tax imposed by paragraph 212(1)(b) on amounts paid or credited by Canco to a XXXXXXXXXX LP in respect of that portion of a Particular Interest Payment that does not exceed the aggregate of each UK Limited Partner’s share of the Particular Interest Payment, since each UK Limited Partner’s share of the Particular Interest Payment is interest to which paragraph 3(c) of Article 11 of the UK Tax Treaty applies.

Comments

This Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016 and is binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.

This Ruling is based on the Act and the UK Tax Treaty in their present form and does not take into account amendments to the Act or the UK Tax Treaty which, if enacted into law, could have an effect on the Ruling provided herein.

Nothing in this Advance Income Tax Ruling should be construed as implying that the Canada Revenue Agency has confirmed, reviewed, or made any determination that any of the XXXXXXXXXX LPs is a partnership for purposes of the Act.

Yours truly,

XXXXXXXXXX
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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