The CRA approach to upstream loans in determining share TCP status may permit the manipulation of that status

2015-0624511I7 and 2012-0444091C6 indicate that the indebtedness between a parent and a wholly owned subsidiary has no impact on the determination of whether the value of the shares of the parent was derived directly or indirectly from real property situated in Canada. However, where an upstream loan is made to a parent, the funds in fact received by the parent are not ignored in determining whether the parent’s shares are taxable Canadian property (TCP). This creates the potential for the simple expedient of making an upstream loan to convert the shares of the parent from TCP to non-TCP.

An example is given of a grandchild Canadian real estate subsidiary (Cansub), whose shares to its immediate parent (Canco) proportionately represent a 55% real estate asset to Canco given that it also has substantial cash, making an upstream loan of that cash to Canco. Because that upsteam loan is to be ignored, there is a pro tanto reduction in the value of the Cansub shares to Canco under the special CRA approach (although the Cansub shares thereby effectively become a 100% real estate asset under that approach). However, because of the influx of cash to Canco, its assets now are proportionately only 40% real estate. Accordingly (leaving aside the 60-month tainting rule), the shares of Canco no longer are TCP to its Canadian shareholder (Canhold), and the shares of Canhold no longer are TCP to its non-resident shareholder.

Neal Armstrong. Summary of Jin Wen, “TCP and Intercompany Loans,” Tax for the Owner-Manager, Vol. 20, No. 2, p. 9 under s. 248(1) – taxable Canadian property – (d).