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.
Principal Issues: How is subs. 17.1(1) formula to be applied with respect to a PLOI denominated in foreign currency when no subs. 261(3) election has been made by the CRIC?
Position: For the purposes of element A of the formula, the prescribed rate for the quarter in which interest has been paid must be applied to the principal amount of the PLOI converted into CAN$ using the relevant spot rate on the day the indebtedness came into existence. For the purposes of element B of the formula, the amount included in the CRIC's income on account of interest on the PLOI must be converted into CAN$ using the relevant spot rate on the day the interest is paid or becomes payable.
Reasons: Wording of the ITA.
XXXXXXXXXX
2014-051715
Hugo Gravel, LL.B., D. Fisc.
June 4, 2014
XXXXXXXXXX :
Subject : Computation of interest at prescribed rate for s. 17.1 ITA
This is in response to your e-mail dated January 7, 2014 wherein you inquired as to how to apply the formula set out in paragraph 17.1(1)(b) of the Income Tax Act, 1985 R.S.C., c. 1 (5th suppl.), as amended (the "ITA") when the indebtedness toward a corporation resident in Canada (a "CRIC"), referred to in this paragraph, is denominated in a currency other than the Canadian currency ("CAN$") and the CRIC has not made a functional currency election pursuant to subsection 261(3) ITA.
Our comments
This technical interpretation provides general comments about the provisions of the ITA and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Subsection 17.1 ITA would generally apply in circumstances where a non-resident corporation owes an amount to a CRIC and the amount is a pertinent loan or indebtedness (a "PLOI"), as defined in subsections 15(2.11) or 212.3(11) ITA. A PLOI means a loan or an indebtedness with respect to which an election has been made, if certain conditions are met, under either subsection 15(2.11) ITA (in situations where subsection 15(2) ITA would otherwise apply with respect to the loan or indebtedness), or under 212.3(11) ITA (in situations where subsection 212.3(2) ITA would otherwise apply with respect to the loan or indebtedness).When subsections 15(2) (read in conjunction with 214(3) ITA) or 212.3 ITA apply, the CRIC is deemed to have paid a dividend, in the amount of the loan or indebtedness, to the non-resident debtor. However, when a PLOI election is made under either subsections 15(2.11) or 212.3(11) ITA, the CRIC is not subject to subsections 15(2) or 212.3(2) ITA, but instead, subject to 17.1 ITA, with respect to the PLOI.
If subsection 17.1 ITA applies for a taxation year of the CRIC, the CRIC must include in its income an amount equal to the amount that would be included in the income of the CRIC for the taxation year if the interest on the PLOI were computed at the prescribed rate minus the amount included in the income of the CRIC on account of interest on the PLOI.
Pursuant to paragraph 261(2) ITA, and subject to an election being made under subsection 261(3) ITA, in determining the Canadian tax results of a corporation resident in Canada for a taxation year, CAN$ is to be used. Also, pursuant to paragraph 261(2)(b) ITA, if an amount that is relevant to such a determination is denominated in a currency other than CAN$, such amount must be converted in CAN$ using the relevant spot rate for the day on which the amount arose.
The expression Canadian tax results is defined in subsection 261(1) ITA and includes, inter alia, the amount of the income of the taxpayer for a taxation year. The expression relevant spot rate is also defined in subsection 261(1) ITA and means, in respect of the conversion of an amount from a particular currency into another currency for a particular day, when the other currency is Canadian currency, generally, the rate quoted by the Bank of Canada for noon on that day.
The amounts owing and the amounts included in the CRIC's income on account of interest in respect of the amounts owing, referred to in subsection 17.1 ITA, are amounts relevant in computing the Canadian tax results of a taxpayer, i.e. the income of the CRIC. Being denominated in a currency other than CAN$, they must therefore be converted into CAN$ using the relevant spot rate for the day on which they arise pursuant to paragraph 261(2)(b) ITA.
The amount, if any, determined by the formula A B in paragraph 17.1(1)(b) ITA is to be included in the CRIC's income for a taxation year. Element A is, generally, the amount that would be included in the CRIC's income had the interest on the PLOI been computed at the prescribed rate. The moment the PLOI arose is the moment the indebtedness has been created. Therefore, the prescribed rate of interest provided by paragraph 4301(b.1) of the Income Tax Regulations, C.R.C. 1979, c. 945, as amended, will be applied to the principal of the loan converted in CAN$ using the relevant spot rate at the time the indebtedness has been created.
Element B of the formula is the amount actually included in the CRIC's income on account of the interest with respect to the PLOI. The moment such an inclusion arises is the moment the interest is received or becomes receivable, subject to subsections 12(3) and (4.1) ITA. Therefore, provided subsections 12(3) and (4.1) ITA do not apply, such amount will be converted into CAN$ using the relevant spot rate at that time. Should the amount determined under A be higher than the amount in B, the difference will be included in the CRIC's income pursuant to section 17.1 ITA.
We trust these comments are of assistance.
Randy Hewlett
Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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