Finance is looking into the circular interactions between draft s. 247(1.1) and other parts of the Act

At the 15 May 2015 IFA Finance Roundtable, Ted Cook indicated that the purpose of s. 247(1.1) was to resolve ambiguity as to the ordering of the respective operations of Parts I and XVI.1 – for example, where a management fee paid by a Canadian taxpayer to a non-arm’s-length non-resident was found to be inappropriate, that could trigger s. 247, but the fee could also trigger s. 18(1)(a) on the grounds that the fee was not paid for the purpose of earning business income. Accordingly, s. 247(1.1) establishes that the operation of the transfer rules occurs as the first step. Finance considers that this is a sensible approach, as s. 247 adjusts the tax base, and the tax base should be set before other types of adjustments are applied.

Finance has heard the tax community’s concerns about circular interactions between s. 247 and other parts of the Act, and is looking into this issue.

An example (provided by Stephanie Smith) of the interaction of Part XVI.1 and a Part I provision (s. 18(4)), occurs where Canco is paying interest at 5% on a $100 million debt owing to a non-arm’s-length non-resident shareholder where an appropriate arm’s-length interest rate would have been 3%, resulting in the disallowance of $2 million of interest expense under s. 247(2). The next step is to turn to Part I. If Canco had $60 million in equity, meaning its debt-equity ratio was about 1/10 higher than the 1.5:1 ratio in s. 18(4), approximately 1/10, or $300,000, of the interest deduction then would be denied under s. 18(4).

She indicated that Finance would not normally expect an upward adjustment under Part XVI.1 to have tax consequences to a Canadian corporation under s. 85.

Neal Armstrong. Summary of 15 May 2019 IFA Finance Roundtable – “Proposed s. 247(1.1)” under s. 247(1.1).