CRA finds that an interest-free loan from a CFA of Canco to a NR sister of Canco was subject to Part XIII tax

A foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. As the loan was not exempted under the inter-foreign affiliate exemption in s. 80.4(8), the deemed interest-free benefit imputed under s. 80.4(2) was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.

CRA then noted that this tax liability of Finco could attach under s. 160(1) to dividends that flowed up the chain to Canco. There also was potential liability of the directors of Finco under s. 227.1 (so that in establishing a due diligence defence, they might have to explain how they could have missed such palpably obvious points of Canadian tax law.)

No mention of Oceanspan or principles of territoriality. CRA doubtless was focused on the fact that value was leaving the Canco silo, but note that under its technical analysis, CRA was purporting to impose s. 215(1) liability on a foreign person (Finco) in respect of a deemed benefit that was conferred by it on another non-resident (Foreign Sub).

Neal Armstrong. Summaries of 16 August 2017 Internal T.I. 2015-0622751I7 under s. 15(2.9), s. 160(1) and s. 227.1(1).