Publication
title
Cross-border Transactions: Proposed Elimination of Canadian Withholding Tax
DATE
April 3, 2007
EXPERTISE
On March 19, in its second budget, the federal Conservative Government announced significant measures to eventually eliminate withholding tax on interest paid by Canadian-resident corporate borrowers to arm's length non-residents, regardless of the latters' country of residence.
Under current legislation, the statutory exemption from withholding tax on interest payments by Canadian residents to non-Canadian residents relates only to long- and medium-term corporate debt-where the borrower is not obligated to pay more than 25% of the principal amount of the obligation within five years of the date on which the debt is advanced (subject to certain exceptions). Thus, revolving and short-term facilities, as well as many structured products, generally do not qualify for the exemption.
The Budget announced that an agreement in principle has been reached to amend the Canada-United States Income Tax Convention (the "Treaty") to eliminate withholding tax on interest payments between residents of Canada and residents of the United States who deal at arm's length and, over a three-year period, to reduce and then eliminate withholding tax on such interest payments made on a non-arm's length basis. Once the Treaty amendment comes into effect, it is proposed to amend Canadian legislation to eliminate withholding tax on interest paid by residents of Canada to all arm's length non-residents, regardless of their country of residence.
It is anticipated that the elimination of this withholding tax will substantially improve Canadian enterprises' access to international debt markets through the reduction of financing costs and will lead to an increased volume of cross-border financing transactions.
In terms of timing, while the Budget announcement stated that the negotiations on the Treaty are to conclude "in the very near future", there was no formal statement as to when the Treaty amendments-and hence the legislative amendments to implement the broader global withholding tax relief-are to be effected. We will of course continue to keep a watching brief.
Ogilvy Renault provides a seamless, dedicated service to clients through its London and Canadian offices, handling complex, cross-border financing transactions in an efficient and cost-effective manner. In this context, our UK- and US-qualified finance team and our Canadian tax team will be happy to respond to any queries on these important budgetary proposals and to advise on transactional opportunities presented by the proposed changes.
Nicola Ezra
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
© Ogilvy Renault LLP 2007 - All Rights Reserved
Contacts
Nicola Ezra
London
011.442.1914
nezra@ogilvyrenault.com
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Adrienne F. Oliver
Toronto
416.216.1854
aoliver@ogilvyrenault.com
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Len Farber
Ottawa
613.780.8650
lfarber@ogilvyrenault.com
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Jules Charette
Montréal
514.847.4450
jcharette@ogilvyrenault.com
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Jacques Côté
Québec
418.640.5041
jcote@ogilvyrenault.com
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