All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

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



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 (

Tel: +1 514 982 5025 and
Emmanuel Sala (

Tel: +1 514 982 5081

Blake, Cassels & Graydon


more across site & bottom lb ros

More from across our site

This week Brazil’s former President Luiz Inacio Lula da Silva came out in support of uniting Brazil’s consumption taxes into one VAT regime, while the US Senate approved a corporate minimum tax rate.
The Dutch TP decree marks a turn in the Netherlands as the country aligns its tax policies with OECD standards over claims it is a tax haven.
Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
Tax directors have called on companies to better secure their data as they generate ever-increasing amounts of information due to greater government scrutiny.
Incoming amendments to the treaty could increase costs on non-resident Indian service providers.
Experts say the proposed minimum tax does not align with the OECD’s pillar two regime and risks other countries pulling out.
The Malawian government has targeted US gemstone miner Columbia Gem House, while Amgen has successfully consolidated two separate tax disputes with the Internal Revenue Service.
ITR's latest quarterly PDF is now live, leading on the rise of tax technology.
ITR is delighted to reveal all the shortlisted firms, teams, and practitioners for the 2022 Americas Tax Awards – winners to be announced on September 22
‘Care’ is the operative word as HMRC seeks to clamp down on transfer pricing breaches next year.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree