8 February 2001 External T.I. 2001-0064555 - Meaning of Amount

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.

Principal Issues:

Whether subsection 17(1) of the Act applies when a resident corporation pays an amount to a third party on behalf of a related non-resident corporation in consideration for shares of the non-resident corporation and the non-resident corporation fails to issue the shares.

Position: Yes, although the situation outlined in the letter was somewhat unclear.

Reasons: Subsection 17(1) of the Act refers to an "amount" owing from a non-resident person to a resident corporation. This term is broad enough to include the value of the obligation of the non-resident corporation to the resident corporation in the situation outlined in the letter.

XXXXXXXXXX 	2001-006455
		Eliza Erskine
February 8, 2001

Dear XXXXXXXXXX:

Re: Subsection 17(1) of the Income Tax Act (the "Act")

This is in reply to your letter of January 4, 2001, requesting our opinion as to whether subsection 17(1) of the Act, as amended by S.C. 1999, c. 22, would apply to a particular fact situation. In your letter, you outline the following fact situation:

1. Foreign Corporation 1 ("FC1") was incorporated in 1992 in a foreign jurisdiction and is a non-resident of Canada. Its sole shareholder was (and continues to be) Canco, a corporation resident in Canada.

2. At the time that FC1 was incorporated, it was intended that Canco would pay FC1 $16,000,000 in exchange for $16,000,000 worth of preferred shares of FC1 (the "Preferred Shares").

3. It was intended that FC1 would use the $16,000,000 obtained from issuing the Preferred Shares to Canco to acquire shares (the "FC2 Shares") of Foreign Corporation 2 ("FC2"), a corporation that is not resident in Canada and is incorporated in the same jurisdiction as FC1.

4. FC1 acquired the FC2 Shares in 1992 for $16,000,000, however, the funds for the purchase of the FC2 Shares were paid on behalf of FC1 by Canco directly to FC2.

5. For unknown reasons, the Preferred Shares were never issued to Canco.

6. Counsel in the foreign jurisdiction have advised that the payment of $16,000,000 by Canco to FC2 on behalf of FC1 means that FC1 has an obligation/liability to issue the Preferred Shares to Canco.

It is your view that subsection 17(1) of the Act does not apply to the fact situation described above because the term "amount", as used in subsection 17(1), was not intended to include non-monetary obligations, such as obligations to deliver property (e.g., deliver shares), perform services, or do or refrain from doing certain acts. You suggest that if subsection 17(1) did apply to situations involving non-monetary obligations, it would be "unfair" to the Canadian corporation obligee, since the Canadian corporation would not be the party responsible for, or able to control, the performance of the obligation.

You also take the position that there is a distinction between the situation where a corporation loans money to a non-resident person for little or no interest in order to avoid tax, and the situation where a corporation pays a non-resident person for services or goods which are never provided. You suggest that no tax avoidance arises in the latter case because there would be no intention to avoid tax.

Our Comments

The situation outlined in your letter appears to relate to an actual completed transaction. We note that written confirmation of the tax implications arising from particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide some general comments.

The fact situation set out in your letter is missing information and is, therefore, unclear. For example, you do not explain why the Preferred Shares were never issued to Canco, saying only that this was "for some ... reason that is not clear". Also, you state that "it was intended that" Canco would "invest $16,000,000 in" FC1 "in exchange for" the Preferred Shares, however, you do not detail how the transaction was actually structured. Accordingly, our comments are based on the assumption that the funds advanced by Canco to FC2 on behalf of FC1 did result in an obligation/liability of FC1 and did not constitute a form of contributed surplus.

Subsection 17(1) of the Act generally applies where a non-resident person "owes an amount" to a corporation resident in Canada and the amount has remained outstanding for longer than one year without the corporation including in its income interest "...computed at a reasonable rate...", on the amount owing. If subsection 17(1) applies, the corporation is treated as having received interest income in respect of the amount owing, computed at a prescribed rate.

Subsection 248(1) of the Act defines an "amount" to be

... money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing ...

We do not necessarily agree with you that the liability of FC1 to Canco is in fact a "non-monetary" debt. It is unclear to us how the described fact situation results in an obligation to Canco that is distinguishable from a more typical monetary obligation. However, we have not considered this issue in detail, as we do not have enough information to do so. Moreover, it is our view that subsection 17(1) of the Act applies to the described fact situation regardless. In essence, Canco (a corporation resident in Canada) has granted FC1 (a non-resident) the use of $16,000,000 and has received nothing in return, resulting in FC1 owing Canco an "amount" that has now been outstanding for more than one year.

In our opinion, there is no reason for the word "amount", as used in subsection 17(1) of the Act, to be interpreted otherwise than in accordance with the full meaning assigned to it by subsection 248(1) of the Act. As you point out in your letter, the word "amount" was specifically chosen by the legislators to avoid the restrictive interpretation given to the word "loan", which was used in subsection 17(1) of the Act as it was prior to being amended by S.C. 1999, c. 22 (hereafter referred to as "former subsection 17(1)"). We do not agree that there is an implication, arising out of the interpretation and application of former subsection 17(1), that subsection 17(1) was intended to be restricted to what you refer to as "monetary" obligations. Although subsection 17(1) may have been amended to address specific issues (e.g., the application of subsection 17(1) to indebtedness represented by the unpaid purchase price for property acquired), there is no reason to assume that the legislators intended to restrict themselves to addressing only those issues in amending subsection 17(1).

With respect to your concerns regarding the application of subsection 17(1) of the Act to other scenarios referred to in your letter (e.g., payments for services not rendered), we note that it is a question of fact whether a non-resident "owes an amount" to a corporation resident in Canada. Also, we would like to bring to your attention that subsection 17(9) of the Act provides a general exception to the application of subsection 17(1) where:

• the parties are unrelated,
• the amount owing arose in the ordinary course of business, and,
• the terms and conditions of the amount owing are such that arm's length parties would have been willing to enter into them.

Without purporting to provide a detailed analysis of the application of subsection 17(9) of the Act, we submit that subsection 17(9) ensures that subsection 17(1) of the Act will not generally affect typical, arm's length, commercial transactions. In circumstances where subsection 17(9) does not apply, such as where the parties to a transaction are related, tax avoidance considerations suggest that the term "amount", as used in subsection 17(1), should be given its usual broad meaning as set out in subsection 248(1) of the Act. If you continue to have concerns that certain scenarios now fall within the ambit of subsection 17(1) that in your view are not offensive to tax policy, these issues should be brought to the attention of the Department of Finance.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and, therefore, as described in paragraph 22 of Information Circular 70-6R4, are not binding on the Canada Customs and Revenue Agency. Furthermore, nothing in these comments should be construed as an opinion regarding the application of former subsection 17(1) of the Act to the fact situation outlined in your letter. As indicated above, we do not have enough information to comment on whether the payment of funds by Canco to FC2 on behalf of FC1 constituted a "loan" to FC1 (as that term was used in former subsection 17(1)), for the 1992 to 1998 taxation years.

We trust that the above comments will be of some assistance to you.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch