The narrowing of the money-lending exception from the upstream loan rule may require taxpayers to take remedial action on existing upstream loans

S. 90(8)(b) provides one of the exceptions to the application of the upstream loan rule in s. 90(6), namely, for indebtedness that arose in the ordinary course of the creditor’s business (suggested to be, generally, trade accounts receivable rather than loans) or a loans made in the ordinary course of the creditor’s ordinary business of lending money, if bona fide arrangements were made, at the time the indebtedness arose or the loan was made, for repayment within a reasonable time.

The August 9, 2022 proposals would narrow the second, moneylending business, exception, while leaving the trade receivables exception intact. In particular, the proposed amendment would provide that if, at any time during which the upstream loan is outstanding, less than 90% of the aggregate outstanding amount of the loans of the business is owing by borrowers that deal at arm’s length with the lender/creditor, the money-lending business exception would not apply to the loan. (There is a similar narrowing of s. 15(2.3).)

Where there is intended reliance on the moneylending business exception, there will need to be a calculation of the percentage representing the moneylending to entities within the group, during all of the time in which the loan is outstanding – which could create difficulties if inter alia loan balances vary on a daily basis.

This amendment applies not only to loans made after 2022, but also to any portion of a particular loan made before 2023 that remains outstanding on January 1, 2023 as if that portion were a separate loan that was made on January 1, 2023 – so that taxpayers may be required to take remedial action in respect of pre-existing upstream loans.

Neal Armstrong. Summary of Audrey Dubois, “Upstream Loans: Limitation on the Scope of the Moneylending Business Exception,” International Tax Highlights, Vol. 1, No. 2 November 2022, p. 9 under s. 90(8)(b).