Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Tax Executives Institute Conference
Question XXV Guarantee Fees
A Canadian parent corporation (Canco) and its U.S. subsidiary (USco) participate in a shared credit facility that benefits both parties. The agreement calls for a guarantee from Canco on any loan made by a third party to USco and vice versa. No guarantee fees are charged or paid between Canco and USco. Is Canco required to include a deemed guarantee fee in computing its income? If so, is Canco entitled to a deduction of an amount representing a deemed payment of a guarantee fee to USco in computing its income? Is tax under Part XIII of the Income Tax Act (the "Act") exigible on such a deemed payment of guarantee fee to USco? In the event that Canco is required to honor its guarantee, will Canco have a capital loss?
Canada Customs and Revenue Agency Response
As there is insufficient facts to deal with the impact of the reciprocal guarantees, our response below first deals with the situation where Canco guarantees the loans of USco for no consideration and then the situation where USco guarantees the loans of Canco for no consideration. The following comments assume that the fair market value of the guarantees and the benefits mentioned below have been established.
Canco Guarantees the Loans of USco
For taxation years or fiscal periods that begin after 1997, subsection 247(2) of the Act will apply such that any amounts that would otherwise be determined for the purposes of the Act will be adjusted to the quantum or nature of the amounts that would have been determined if the terms and conditions of the guarantee agreement between Canco and USco had been those that would have been made between persons dealing at arm's length. (For taxation years prior to that, former subsection 69(3) of the Act would apply to the situation.) In other words, Canco will be deemed to have received a guarantee fee at fair market value for its guarantee of the loans of USco and such amount will be required to be included in computing the income of Canco. Subsection 247(3) of the Act will also apply as a result of the adjustments made under subsection 247(2) of the Act.
If Canco is required to make a payment with respect to its guarantee of the loans of USco, Canco is considered in law to have acquired a debt owed by USco. In the event that the debt has established to be bad, there are insufficient facts available to determine whether paragraph 40(2)(g) of the Act will apply to deem the resulting capital loss to be nil.
USco Guarantees the Loans of Canco
As was the case prior to the coming into force of subsection 247(2) of the Act, where a benefit conferred on Canco by USco has been established, subsection 15(1) of the Act will apply to include the amount of the benefit in computing the income of Canco.
Under subsection 247(10) of the Act, a downward adjustment (e.g., a deduction from income) under subsection 247(2) of the Act will not be made unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made. In general, as subsection 15(1) of the Act is more specific in dealing with this situation, subsection 247(2) of the Act will not be applied. As subsection 247(2) of the Act will not be applied, no amount will be deemed to have been paid or credited pursuant to paragraph 214(15)(a) of the Act as a repayment of interest. Consequently, no Part XIII tax is exigible.
Author: Simon Leung
December 2, 1999
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