MIC Foreign Investors & Withholding Taxes on Dividends
Position: We were unable to provide a favourable ruling.
Reasons: The deemed interest payments met both the obligation test and the participation conditions described in the definition of PDI in Part XIII. The words of paragraph 214(3)(e) that deem the deemed interest to be paid on a bond (an obligation) are sufficient to consider that interest was paid on an obligation for the purposes of the definition of PDI. The dividends paid from the Corporation that are deemed to be interest, were computed by reference to the taxable income, profit, cash flow or other similar criterion described in the definition of PDI.
Re: Advance Income Tax Ruling Request – XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the XXXXXXXXXX (the “Corporation”).
The Corporation is qualified as a “mortgage investment corporation” (“MIC”) within the meaning of subsection 130.1(6) and for the purposes of the Income Tax Act (the “Act”). The amount of the dividends paid by the Corporation take into account, inter alia, its income, the results of the Corporation’s operations, cash requirements, financial conditions, etc. You requested a ruling be given that the taxable dividends paid to non-resident shareholders of the Corporation, which are deemed to be interest paid on a bond, would not fall within the meaning of “participating debt interest” (“PDI”) as defined in subsection 212(3) of the Act.
As discussed in the telephone conversation of XXXXXXXXXX, we are unable to provide a favourable ruling for the reasons explained in our comments below.
In general terms, interest and dividends paid, or deemed to be paid by Part I of the Act, by a corporation resident in Canada to a non-resident may be subject to Part XIII tax. Paragraph 212(1)(b) provides that interest payments will be exempt from Part XIII tax with the exception of interest that is not “fully exempt interest” and is paid or payable to a person with whom the payer is not dealing at arm’s length, or is PDI as defined in amended subsection 212(3) of the Act. In general terms, PDI is interest that is paid on “an obligation” and has any one of the participatory features described in the definition of PDI, which reads as follows:
“participating debt interest” means interest (other than interest described in any of paragraphs (b) to (d) of the definition “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.
With respect to shareholders of an MIC, subsection 130.1(2) of Part I of the Act deems dividends that are received by shareholders from a MIC to have been received by the shareholder as interest payable on a bond issued by the corporation. Section 214 sets out rules for dividend payments made by a MIC to non-resident shareholders for the purposes of Part XIII. Paragraph 214(3)(e) states:
where subsection 130.1(2) would, if Part I were applicable, deem an amount received by a shareholder of a mortgage investment corporation to have been received by the shareholder as interest, that amount shall be deemed to have been paid to the shareholder as interest on a bond issued after 1971.
With respect to the “obligation” test in the definition of PDI, the words of paragraph 214(3)(e) deem the payment to be paid to the shareholder as “interest on a bond”. An “obligation” referred to in the definition of PDI will include a bond. Accordingly, it is our view that these payments will be considered as “interest… paid or payable on an obligation” for the purposes of the definition of PDI.
With respect to the participation features described in the definition of PDI, this condition is met where all or any portion of the interest is contingent or dependent on or computed by reference to any one the relevant participation features described in the definition of PDI. In the circumstances described, the dividends paid from the Corporation, which are deemed to be interest, were computed by reference to the income, profit, cash flow or other similar criterion described in the definition of PDI.
Accordingly, the deemed interest payments would meet the condition that they are interest paid on an obligation and that they are of a participatory nature described in the definition of PDI. As a result, these payments can be considered to be PDI that may be subject to Part XIII tax.”