February 2008

Elimination of withholding tax

In the May 2007 edition of Inform, we gave you a heads-up about the federal government’s intention to eliminate Canadian withholding tax on interest paid to all arm’s-length (unrelated party) non-residents, regardless of their country of residence. This amendment was to take effect once the fifth protocol to the Canada-U.S. Tax Treaty was ratified, sometime in 2008.

On Nov. 13, 2007, Canada’s minister of finance moved up this change with a motion to eliminate withholding tax on payments of interest, regardless of the timing of the fifth protocol. This legislation was passed, and, as of Jan. 1, 2008, interest (other than participating debt interest as defined in the Income Tax Act) paid to all arm’s-length non-residents of Canada (including residents of the United States) is exempt from withholding tax. 

How does this affect you?

Previously, withholding tax was imposed at a rate of 25 per cent of the gross amount of interest but was generally reduced to 10 per cent due to bilateral tax treaties. This has been an obstacle for non-residents who lend in the Canadian marketplace. The removal of this tax will allow Canadian borrowers greater access to foreign capital for cross-border loan and securitization transactions. Also, borrowing costs will likely be lowered and loans will be made with less restrictive conditions.

Please be aware that payments of interest to related (non-arm’s-length) parties will continue to be subject to the applicable withholding tax. Moreover, the elimination of the withholding tax does not apply to other forms of income, like dividends, trust distributions and royalties.  

How is CIBC Mellon Trust responding?

As of Jan. 1, 2008, CIBC Mellon no longer applies Canadian non-resident withholding tax on arm’s-length payments of interest. To make sure these changes have minimum impact on you, we have:

• Contacted all non-resident debt holders to confirm whether they are arm’s-length or non-arm’s-length lenders
• Updated our register and payment system by removing tax withholding rates, as appropriate
• Amended our tax reporting system to ensure that we correctly record information on the relevant tax forms

For further information about the changes we have made, please contact your account manager.

By Mahomed Limbada, executive director, corporate trust services

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Inform® is provided for general information purposes only and CIBC Mellon Trust Company, CIBC Mellon Global Securities Services Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.