6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.13

The Explanatory Notes to s. 15(2.16) indicate that there is no objective of attacking commonplace loan transactions which are not intended to circumvent s. 15(2). Furthermore, as these rules apply to loans outstanding on March 22, 2016, this could prejudice numerous taxpayers who contracted loans in good faith. In addition, the "specified right" definition in s. 18(5) refers to an exclusion provided in s. 18(6)(d)(ii), which it would be difficult to consider applicable in the context of s. 15(2.16).

What is the policy respecting the date for application of ss. 15(2.16) to (2.192) as well as the use of the definition “specified right” for purposes of their application? Finance responded:

Contextual changes to the definition of "specified right" in subsection 18(5) are necessary to give full effect to the reference to this definition in paragraph 15(2.192). In applying these contextual changes, references in the definition of "specified right" to amounts described in subparagraphs 18(6)(d)(i) or (ii) refer, in general terms, to a shareholder's debt to a creditor, or any other debt that a non-arm's length shareholder owes to a creditor. The right of the creditor should not be considered as a "specified right" if the net proceeds of the exercise of that right are to be applied to one or more of those debts.

…The effective date of the back-to-back loan rules depends on the presence of one or more intermediaries. In the case of a back-to-back loan arrangement involving only one intermediary, the rules apply to the loan received or debt incurred after March 21, 2016 and to the portions of loans received and debts incurred prior to March 22, 2016 that were outstanding at that date. In the case of back-to -back loan arrangements involving more than one intermediary, the rules apply to loans received and debts incurred after 2016 and to the portions of loans received and debts contracted before 1 January 2017 that were outstanding on that date.

The back-to-back loan rules apply as soon as the criteria are technically satisfied. Where the criteria set out in subsection 15(2.16) are satisfied, the shareholder benefit rules apply to an arrangement or mechanism, even if the facts and circumstances do not actually reveal an intention to circumvent the application of subsection 15(2). The rules are simply a function of the source of funds. This approach is consistent with the underlying technical approach of subsection 15(2), which is not articulated around a "purpose" test.

When asked to comment on the policy respecting the use of the definition “specified right” for purposes of the application of ss. 15(2.16) to (2.192), Finance stated:

Where a right in the assets of the corporation has been granted as security to ensure that such assets are available to the intermediary and may be used by the intermediary without any restriction, the shareholder benefits rules will usually apply. On the other hand, where the right that is granted is a right usually granted as security for payment under arm's length commercial agreements between arm's length parties, so that the assets related to the right may be used only to pay the debt and related interest, the shareholder benefit rules will usually not apply.

…By way of illustration…:

[A] right should not be considered a "specified right" simply because the right secures debts that the shareholder of the corporation and the corporation itself owe to a financial institution.