Canada: Participating interest: No loophole under the Canada-US Tax Convention

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: Participating interest: No loophole under the Canada-US Tax Convention

gagnon.jpg

sala.jpg

Jean Marc Gagnon


Emmanuel Sala

Effective 2010, the Canada-US Income Tax Convention (treaty) eliminated withholding tax imposed by a source country on cross-border interest payments, unless exceptions apply. Under Canadian tax law, only arm's-length interest payments are exempt from withholding tax, subject to exceptions. One exception common to some extent both to the treaty and the Canadian law relates to interest payments that under US law are affected by a contingency and under Canadian law measured somehow with reference to the value of other property. Under subparagraph XI(6)(b) of the treaty, interest payments "determined with reference […] to any change in the value of any property of the debtor […]" (emphasis added) remain subject to a 15% withholding tax. Under the Canadian law, "participating debt interest" is " … contingent or dependent on the use of or production from property in Canada or … computed by reference to […] commodity price […] or any other similar criterion" is subject to a 25% withholding tax, subject to reduction under a tax treaty.

Despite their apparent resemblance, one can see distinctions between the treaty notion of participation and contingency and even, in the Canadian test, a distinction between these two notions. Notably, contingency and measurement indices affecting the payment of interest are not the same notions. Moreover, the treaty relies upon a connection between the participating amount and the debtor's receipts or property, whereas the Canadian law requires no such nexus.

There is quite a long history on the part of taxpayers, tax advisers and the Canada Revenue Agency considering whether interest payments computed with reference to a public benchmark commodity index and not with reference to the value of any specific property of the debtor are subject to withholding under Canadian law, but eligible for treaty exemption. In many cases, such a computational reference would not result in a loss of an exemption from withholding tax.

In a recent interpretation, the Canadian tax authorities have considered whether there would be a strong enough link between the value of the debtor's property and the value of a commodity on a stock exchange, as they thought in the case considered, that interest linked to the index price of the commodity would be considered to fall within subparagraph (6)(b) of Article XI of the treaty, that is to be referable to a debtor's property. From the authorities' point of view, the commodity index from which an interest is computed creates a sufficient link to the change in value of the debtor's property when the debtor's principal assets consist of resource property rights which are being held for the purpose of extracting the commodities making up the index. The statements made by the Canadian tax authorities do not make clear as to what constitutes a sufficient linkage between interest paid by the debtor and its property for such interest to be considered to fall within subparagraph (6)(b) of Article XI. Although the circumstances that were considered by the Canadian tax authorities involved a debtor, the principal assets of which were resource properties (that is the commodities to which interest was linked) they stated that subparagraph 6(b) of Article XI was to be read broadly so as to capture interest computed by reference to a commodity "where there is a link or connection between the commodity price and the value of any property of the debtor". It is not clear that Canadian tax authorities would have taken such a position in a situation where the relevant commodity was not so central to the debtor's business operations. As may be inferred from the earlier references concerning how the Canadian law and the treaty measure participation in relation to Canadian interest, this conclusion may be less clear than the Canadian tax authorities' recent conclusion otherwise might suggest.

Jean Marc Gagnon (jean.gagnon@blakes.com)

Tel: +1 514 982 5025 and
Emmanuel Sala (emmanuel.sala@blakes.com)

Tel: +1 514 982 5081

Blake, Cassels & Graydon

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article