Withholding Tax Obligations On Convertible Debt

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, September 2009

Effective January 1, 2008, the Income Tax Act (Canada) (the Act) was amended to generally eliminate withholding tax on interest paid or credited to non-residents of Canada with whom the payor deals at arm's length. However, payments of "participating debt interest" are still subject to Canadian withholding tax.

"Participating debt interest" is defined in the Act to mean interest paid or payable on an obligation, if all or any portion of such interest is contingent or dependent on the use or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion, on or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.