Finance blesses a CRA workaround for dealing with an upper-tier blocking deficit respecting an upstream loan

Forco 2 which has exempt surplus of $1,000, is held by Canco through Forco 1, which has an exempt deficit of $100 (and no pre-acquisition surplus). Forco 2 makes three successive loans of $100 directly to Canco. In policy terms, Canco should be entitled to a full s. 90(9) reserve for all three loans but, under the current wording, the exempt deficit effectively blocks each successive loan.

Finance noted that although the general policy is that Canco should be permitted to receive the loans without a deemed dividend to the extent that actual distributions would produce that result, this particular situation was amenable to the work-around described at 2016 Roundtable Q.5 (i.e., Forco 2 lends to Canco via Forco 1). However, if taxpayers nonetheless have a “live issue,” Finance would be interested in hearing from them.

Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.11 under s. 90(9).