CRA applies a factual FIFO approach to determining which upstream loans have been repaid first
CRA considers that, in the absence of specific designations, repayments of upstream advances made by a foreign affiliate to its Canadian parent will be treated as being applied to the oldest advance first. This approach is applied without regard to whether the upstream-loan transitional rules deemed an old advance to instead have been advanced on August 20, 2014, so that the repayment under CRA’s factual “FIFO” approach might be applied first to such loan even though there was, say, a 2012 advance that should have been repaid first in order to avoid an income inclusion.
Taxpayers should designate how a repayment is to be applied if they don’t like the results of the default FIFO approach of CRA. At common law, such a designation can be made well after the time of the repayment including, perhaps, even “in the witness-box,” e.g., in any Tax Court trial of how the repayment was applied – see Chitty on Contracts.
Neal Armstrong. Summary of 3 March 2017 Internal T.I. 2016-0673661I7 under s. 90(8)(a).