CRA states that a non-interest-bearing loan from a CFA to a NR sister of the Canadian taxpayer generated double tax (FAPI and Pt. XIII tax)

A wholly-owned foreign subsidiary (FS) of CanCo uses funds generated from its operations to make a non-interest bearing loan to a foreign borrower (FB), which is wholly owned by the foreign parent (FP) of CanCo. The loan is repaid within 2 years so that the upstream loan rules in s. 90(6) do not apply.

CRA stated its “long-standing view” that s. 247(2) can generally apply to transactions between a foreign affiliate and another non-resident in computing the FA’s FAPI. Here, it would apply s. 247(2) to impute interest income to FS and, thus, FAPI to CanCo.

CRA went on to find that this application of s. 247(2) to generate imputed interest to FS did not preclude imputing a s. 80.4(2) benefit to FB. In its view, the s. 80.4(2) benefit would be deemed by s. 15(9) to be a benefit conferred on “a” shareholder (FB), with s. 214(3)(a) deeming this benefit to be paid “to the taxpayer [FB] as a dividend from a corporation resident in Canada.” Thus, in addition to generating FAPI, the interest-free benefit would be subject Part XIII tax, which FS would be required to withhold and remit. As in 2015-0622751I7 , there is no mention of Oceanspan or principles of territoriality.

Neal Armstrong. Summary of 5 May 2021 IFA Roundtable, Q.7 under s. 214(3)(a).