Facts:

  • A Canadian resident is borrowing $5,000,000 from a US resident.
  • The interest rate is set at 8%.
  • Interest of $400,000 per annum will be paid.

Questions:

  • Is interest paid by a Canadian resident borrower to a US resident lender subject to withholding tax?
  • What is the rate of non-resident withholding tax levied by Canada?
  • What is the tax rate in Florida that the interest income will be subject to?

Response:

Canada

Generally, Part XIII of the Canadian Income Tax Act provides that a tax of 25% be withheld on payments to non-residents of Canada on certain Canadian source “passive” income such as interest, dividends, rents, royalties and other similar items.

However, effective January 1, 2008 the withholding requirement on most interest payments made by Canadian borrowers to “arms-length” lenders, was eliminated. This exempt status does not apply if the payments are “participating debt interest” which are effectively distributions of profits.

Interest paid to a lender with whom the borrower does not deal at arm’s-length was exempted from withholding tax requirements effective January 1, 2010 except where the beneficial owner of the interest carries on, or has carried on business in Canada.

Thus, in most cases there will be no Canadian income tax impact of the interest paid.

United States

Federal corporate income tax is imposed at graduated rates from 15% to 35%. Where taxable income exceeds $335,000 all income is taxed at 35%.

The State of Florida has a corporate income tax rate of 5% on all taxable income but no individual income tax.

Prepared by Jerry Paskowitz, CA

[attention]

This memorandum should not be considered to be comprehensive income tax advice. It is provided as a general review of the tax considerations regarding the payment of interest on debt by a Canadian resident payor to a Florida State recipient. The user of this information should be aware that a definitive conclusion can only be made in the context of complete information.

[/attention]

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