CRA finds that a foreign JV company is not a specified debtor of the indirect Canadian JV partner

A Luxembourg subsidiary (Finco) of a Canadian holding company (Canco2) will be lending money to Forco3 on a pro rata basis with the other unrelated shareholder (Forco2) of Forco3. The loans by the two Forco3 shareholders are in "equivalent" amounts, so that there may be an implication that their shareholdings in Forco3 are equal.

As Canco2 does not have a greater than 50% indirect interest in Forco3, Forco3 does not qualify as a CFA of Canco2 for purposes of the upstream loan rules. Accordingly, those rules will not apply to the loans made by Finco to Forco3 only if Forco3 deals at arm’s length with Canco2.

Essentially all the significant decisions respecting Forco3 are made by the two shareholders jointly, so that it might be argued that they are acting in concert and therefore do not deal at arm’s length with Forco3 (see Windsor Plastics [high-water mark of "acting-in-concert"], Petro-Canada cf. McMullen, Lanester). Nonetheless, CRA was willing to accept a representation that Forco3 dealt at arm’s length with Canco2, so that the upstream loan rules did not apply.

Neal Armstrong. Summary of 2014 Ruling 2013-0510551R3 under s. 90(15) – specified debtor.