Principal Issues: When subsection 90(7) applies to deem a loan to have been made, when will the deemed loan be considered "repaid"?
Position: A paragraph 90(7)(a) deemed loan will be considered repaid when a specified debtor repays its loan or indebtedness to the intermediary or it is reasonable to consider that a loan or indebtedness of a specified debtor is no longer funded by a loan from a foreign affiliate.
Reasons: See below.
2013 CTF Conference: Upstream Loans Back-to-back Loans
Question 2.2.2
Subsection 90(7) of the Act collapses certain back-to-back loans into one deemed loan from the initial lender to the intended borrower, to the extent of the lesser loan amount. This deemed loan is subject to the upstream loan rules. Can the CRA provide guidance as to when this deemed loan would be considered repaid? For example, would the CRA consider the deemed loan to be repaid when the underlying loans are repaid?
Response
There is no provision in the Act which deems a loan which has been deemed to have been made by the initial lender to the intended borrower as a result of the application of paragraph 90(7)(a) of the Act to have been repaid. Whether there is a repayment of a paragraph 90(7)(a) deemed loan will depend upon the circumstances of each case. However, we are of the view that a paragraph 90(7)(a) deemed loan will be considered repaid when a specified debtor repays its loan or indebtedness to the intermediary or it is reasonable to consider that a loan or indebtedness of a specified debtor is no longer funded by a loan from a foreign affiliate.
For example, assume that a Canadian resident corporation ("Canco") has a foreign affiliate ("FA"). FA lends $1000 ("Loan1") to an arm's length intermediary ("INT"), which lends $500 to Canco ("Loan2"). Paragraph 90(7)(a) deems a $500 loan to have been made by FA (i.e. the initial lender) to Canco (i.e. the intended borrower). Paragraph 90(7)(b) of the Act, deems Loan 1 and Loan 2 not to have been made to the extent of $500.
Assume that INT repays $500 of Loan1; however, Canco has not repaid any portion of Loan2. It is our view, that in these circumstances, it is reasonable to consider the $500 repaid by INT to FA to be the portion of Loan1 which was not affected by 90(7)(b). As $500 remains outstanding on both Loan1 and Loan2, we would not view any portion of the deemed loan from FA to Canco to have been repaid in these circumstances.
However, suppose that, instead, Canco repaid $100 of Loan2, and INT repays $700 of Loan1. In such case, $300 remains outstanding on Loan1 and $400 remains outstanding on Loan2. It is our view, that under these circumstances, while Canco remains indebted (in respect of Loan2) in the amount of $400, only $300 of Loan2 can be seen as being funded by the $300 balance outstanding on Loan1. Accordingly, in our view, it is reasonable to consider $200 of the original $500 loan which was deemed to have been made by FA to Canco pursuant to paragraph 90(7)(a) to have been repaid in these circumstances.
Angelina Argento
November 24, 2013
2013-050815
