The interaction of the ss. 17 and 247(2.1) rules might generate double taxation
Under proposed s. 247(2.1), amounts are subject first to adjustments as to their quantum (or nature) under s. 247(2), before other provisions can then be applied to such adjusted amounts. Accordingly, cross-border short-term loans that do not meet the conditions of s. 17(8) could now be subject to an imputation of interest based on an arm's-length rate.
S. 17(7) recognizes that where Pt. XIII tax has been imposed on the amount of a loan made to a non-resident by a resident lender, it is inappropriate to also impute interest on that loan under s. 17. However, as s. 247(2) will now apply first, this raises the possibility that an amount of interest will be included in the lender's income in addition to the recognition of a shareholder benefit to the borrower equal to the loan amount.
S. 17 contains recharacterization rules, e.g. for back-to-back loans (s. 17(11.2)) or loans through partnerships or trusts (ss. 17(4) to (6).) Such transactions usually will not be recharacterized under s. 247(2)(d). This raises the possibility of imputation of interest under s. 17 based on the recharacterized transactions rather than interest imputation occurring only under the s. 247(2) rules.
Neal Armstrong Summary of François Fournier-Gendron, “Amendments to the Act: The Impact of Proposed Subsection 247(2.1) on Section 17,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 5 under s. 247(2.1).