26 November 1996 External T.I. 9634635 - STANDBY AND FUNDING FEES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1)Are standby and funding fees exempt under 212(1)(b)(Vii) on a) term loan that is exempt
b) revolving loan where part of it is exempt

Position:

a) Yes
b) No, unless separate obligations

Reasons:

a)satisfies 212(1)(b)(vii) position at APFF 1990, Question 62
b)interest per 214(15)

									963463
XXXXXXXXXX							C. Tremblay

Attention: XXXXXXXXXX

November 26, 1996

Dear Sirs:

Re: Standby and funding fees

This is in reply to your letter of October 17, 1996, wherein you request our comments with respect to taxation under Part XIII of the Income Tax Act (the "Act") of the term loan funding fee, revolving loan funding fees, and revolving loan standby fees in the situation described in your letter.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. If, however, your request describes completed transactions involving a specific taxpayer, your questions should be directed to your District Taxation Services Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Under paragraph 214(15)(b) of the Act, an amount paid or credited as consideration for an agreement to lend money is deemed to be an interest payment only when the non-resident person would be liable to Part XIII tax on any interest payable on the obligation issued under the terms of the agreement. Otherwise, the amounts paid or credited as consideration for the agreement retain their basic characteristics and are not deemed to be interest payments.

In our view, where a funding fee is paid in respect of a term loan which satisfies all the requirements of subparagraph 212(1)(b)(vii) of the Act so that the interest on the loan would not be subject to withholding tax, the funding fee is also not subject to withholding tax under Part XIII regardless of whether it is paid at the beginning or the end of the term of the loan.

In the case of revolving loans, amounts drawn down and due before 5 years from the date of the first draw date will not satisfy the requirements of subparagraph 212(1)(b)(vii) of the Act. Where all the revolving loans form part of the same obligation and the interest thereon is not eligible for the exemption, the standby fees and funding fees are deemed to be interest under paragraph 214(15)(b) of the Act and subject to withholding tax. However, where each drawdown is evidenced by a promissory note so that there are separate obligations each satisfying the requirements of subparagraph 212(1)(b)(vii) of the Act, the standby fees and funding fees that are considered to relate to the exempt loan will also be exempt from withholding tax.

The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch