2022-0954801E5 Interaction of subsections 227(8), (8.3) and (8.5)

Principal Issues: Whether a corporation resident in Canada (CRIC) that has late-filed the form required by subparagraph 212.3(7)(d)(i) could be: • assessed interest on the late remittance of any Part XIII tax required by subsection 212(2) to be withheld from a subparagraph 212.3(7)(d)(ii) deemed dividend, and • assessed a penalty under subsection 227(8) for failing to withhold

Position: Where a CRIC has late-filed the form required by subparagraph 212.3(7)(d)(i), the Minister may assess interest on the late remittance of any Part XIII tax required by subsection 212(2) to be withheld from any resulting subparagraph 212.3(7)(d)(ii) deemed dividend. However, the CRIC would not be assessed a penalty under subsection 227(8) for failing to withhold Part XIII tax on such a dividend.

Reasons: Paragraph 227(8.3)(b) authorizes the Minister to assess interest on an amount required by section 215 to be withheld, beginning on the day on which the amount was required to be withheld and ending on the day that it is paid, or deemed paid by paragraph 227(6.2)(c), to the Receiver General. Paragraph 227(8.5)(b) states that a subsection 227(8) penalty will not apply to a CRIC in respect of Part XIII tax in respect of a dividend it has been deemed to have paid under subparagraph 212.3(7)(d)(ii).

Author: Clarkson, Julia
Section: 227(8), (8.3), (8.5)

XXXXXXXXXX                                                                           2022-095480
                                                                                                  Julia Clarkson

July 20, 2023

Dear XXXXXXXXXX:

Re: Interaction of subsections 227(8), (8.3) and (8.5)

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (Act) or the Income Tax Regulations (Regulations), as amended to the date hereof.

We are writing in response to your letter requesting our views on whether a corporation resident in Canada (CRIC) that has late-filed the form required by subparagraph 212.3(7)(d)(i) could be:

* assessed interest on the late remittance of any Part XIII tax required by subsection 212(2) to be withheld from a subparagraph 212.3(7)(d)(ii) deemed dividend, and

* assessed a penalty under subsection 227(8) for failing to withhold Part XIII tax on such a dividend.

We apologize for the delay in providing our response.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

Section 212.3 contains the foreign affiliate dumping rules. In certain circumstances, paragraph 212.3(2)(a) deems a CRIC to have paid a dividend (Initial Dividend) to each of its parent entities. An Initial Dividend might be reduced through an offset against paid-up capital of one or more share classes of the CRIC if the conditions of subparagraph 212.3(7)(a)(i), (b)(i) or (c)(i) are met. If such a reduction occurs, the CRIC is required to report the prescribed information detailed in subparagraph 212.3(7)(d)(i) “in prescribed manner” by the taxpayer’s filing‑due date (as defined in subsection 248(1)) for its taxation year that includes the dividend time (as defined in subsection 212.3(4)). The Canada Revenue Agency (CRA) has informed taxpayers to provide a letter (Form) outlining the information that the Minister has prescribed to meet the subparagraph 212.3(7)(d)(i) filing requirement.

If the prescribed information is not provided by the required filing-due date, then the paid-up capital offset is effectively reversed through the application of subparagraph 212.3(7)(d)(ii), which deems a dividend (Reduction Dividend) equal to the paid-up capital offset to have been paid on the filing-due date.

Section 215 generally requires that a person that pays (or is deemed to have paid) an amount that is taxable under Part XIII of the Act to withhold and remit that Part XIII tax to the Receiver General on behalf of the non-resident recipient. Subsection 212(2) generally requires a non-resident person to pay a Part XIII tax of 25% on every amount that a CRIC pays as a dividend. Both the Initial Dividend and Reduction Dividend are dividends that are deemed to have been paid for purposes of the Act, and therefore are subject to Part XIII tax under subsection 212(2). As a result, if a Form is filed late, Part XIII tax is required to be withheld from the Reduction Dividend and remitted to the Receiver General.

Assessment of interest

Paragraph 227(8.3)(b) authorizes the Minister to assess interest on an amount required by section 215 to be withheld, beginning on the day on which the amount was required to be withheld and ending on the day that it is paid to the Receiver General. Administratively, a remittance of Part XIII tax related to a Reduction Dividend would be due on or before the 15th day after the month in which the dividend was deemed to have been paid.

Therefore, where a CRIC has late-filed the Form, the Minister may assess interest on the late remittance of any Part XIII tax required by subsection 212(2) to be withheld from any resulting Reduction Dividend.

Subsection 227(6.2) generally allows a refund of Part XIII tax previously paid in respect of a Reduction Dividend deemed to have been paid by subparagraph 212.3(7)(d)(ii) in excess of the Part XIII tax liability related to that dividend if a written application is made no later than two years after the day on which the Form is filed.

For purposes of Part XV of the Act, if the Part XIII tax liability in respect of the Reduction Dividend exceeds any amount paid on behalf of that liability, paragraph 227(6.2)(c) will deem that excess amount to have been paid by the CRIC on the day that the Form is filed. Therefore, the computation of interest on an unpaid Part XIII tax liability in respect of a Reduction Dividend would end on the day the Form is filed as result of the application of paragraphs 227(6.2)(c) and 227(8.3)(b).

Assessment of penalty

Subsection 227(8) generally authorizes the Minister to assess a penalty where a person has failed to deduct or withhold an amount as required by section 215.

Subsection 227(8.5) provides an exception to the application of a subsection 227(8) penalty in certain circumstances. For example, where a CRIC has late-filed the Form, the CRIC would not be assessed a penalty under subsection 227(8) for failing to withhold Part XIII tax on a Reduction Dividend as a result of subsection 227(8.5).

In addition, in our view a penalty under paragraph 162(7)(b) could be applicable for a failure to comply with this duty under the Act as no other provision of the Act applies to penalize a CRIC for failing to provide the Form on time.

We hope our comments have been of assistance.

Yours truly,

Gillian Godson
Section Chief
Administrative Law Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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