CRA responds at the 2014 IFA Roundtable

Here are the principal responses of the Directorate at yesterday’s IFA Roundtable:

• Q.1 - A failure to charge a fee for the provision by Canco of a guarantee of debt of a foreign subsidiary will give rise to an investment by it in the subsidiary under the foreign affiliate dumping rules – but with some (vaguely described) potential for any resulting grind in the paid-up capital of its shares to be reinstated if there is a subsequent distribution of the shares of the subsidiary.
• Q.2 - Where the shares of Can Sub, which carries on a Canadian business, are held by U.S. Parent (which is not a qualifying person but which carries on a connected business) "through" U.S. Holdco, a gain on the sale of the U.S. Holdco shares (which are taxable Canadian property) would be considered to be derived from Canada for purposes of Art. XXIX-A, para. 3 of the Treaty, so that such gain generally would be Treaty-exempt.
• Q.3 - The 90-day rule does not permit accessing current year’s exempt earning under s. 90(9)(a)(i) for an upstream loan. Also, accrued interest is indebtedness for purposes of the upstream loan rules.
• Q.4 - CRA generally will accept that the unavoidable and brief holding of deposits between a borrowing and its application to acquire excluded property, or a sale of excluded property and the application of the proceeds to repay debt, will not "taint" the foreign affiliate in question under s. 95(2)(i). Furthermore, the holding by a foreign affiliate of non-excluded property at the time of its purchase will not taint it in the hands of the purchaser for s. 95(2)(i) purposes if (but only if) such "bad" property is sold later on the day of closing.
• Q. 5 - There is no administrative relief for the triggering of gain under s. 92(4) or (5) of capital gain where there is a s. 85(1) roll by Canco of an interest in a partnership which had received pre-acquisition dividends on the shares of its foreign subsidiary – or a s. 85.1(3) roll of the shares of such foreign subsidiary by the partnership to another foreign affiliate.

Neal Armstrong and K.A. Siobhan Monaghan.  Notes on CRA Roundtable under 2014 IFA Conference.