Upstream loans may still be preferable to paying actual dividends

Notwithstanding the upstream loan rules, a “distribution from a foreign affiliate by means of an upstream loan may still be preferred to a (permanent) distribution from a foreign affiliate by means of an actual dividend, because the upstream loan may avoid foreign withholding and other taxes that would be incurred with an actual dividend.” This may work because the Canco recipient of the loan generally can use the ACB of its shares in the foreign affiliate at the time of the upstream loan (or other surplus), provided that such attributes are not put to use respecting other upstream loans or distributions. A sale of the foreign affiliate to a third party (with the loan kept outstanding) would not preclude continued use of such ACB as at the initial time of the upstream loan.

CRA indicated that Finance is likely to amend the rules so that there is not an inappropriate income inclusion under these rules when an upstream loan is extinguished by operation of law on the winding-up of the foreign affiliate (FA1) under s. 88(3) into the Canco. In policy terms, the upstream loan likely should be considered to be settled for “the paragraph 88(3)(d) determination of Canco's proceeds of disposition of the FA1 shares based in turn on the net distribution amount in respect of the liquidation.”

Neal Armstrong. Summary of Geoffrey S. Turner, "Upstream Loans and Dispositions of Foreign Affiliate Shares", International Tax (Wolters Kluwer CCH), No. 85, December 2015, p.1 under s. 90(9).