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

In 2015-0622751I7, 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.

The latter part of this logic, beginning with the bolded sentence, could be questioned:

[A]rguably, this provision should not be read as deeming Finco to be "a corporation resident in Canada"; it only restates the basic (resident payer) requirement of part XIII after deeming the benefit to be a dividend in order to engage subsection 212(2). If Parliament had intended to apply withholding tax to this clearly extraterritorial situation, it would have deemed Finco to be a person resident in Canada in respect of the benefit conferred on Foreign Sub under subsection 212(13). Absent such explicit provision, basic principles of territoriality dictate that Canada cannot tax the amount (Oceanspan)

Neal Armstrong. Summary of Michael N. Kandev, “NIB Loan to Non-FA-Related Non-Resident,” Canadian Tax Highlights, Vol.26, No. 4, April 2018, p. 5 under s. 214(3)(a).