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 various loans are subject to the provisions of subsection 17(1) and 17(2) of the Act.
Position: See analysis
Reasons:
September 5, 2001
Montreal Tax Services Office HEADQUARTERS
International Audit Karen Power, CA
(613) 957-8953
Attention: George Darsaklis
2001-007315
Application of Section 17 of the Income Tax Act (the "Act")
We are replying to your facsimile of March 5, 2001, in which you requested our opinion on whether section 17 of the Act would apply to a particular fact situation.
The facts, as we understand them, are as follows:
XXXXXXXXXX.
Application of Section 17 to Loan #1
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 17(4) of the Act applies where a non-resident owes an amount to a partnership and that amount is not treated by subsection 17(2) as owing to a corporation resident in Canada. We have reviewed the comments prepared by the large case auditor and agree that subsection 17(2) of the Act will not apply to Loan #1. Where subsection 17(4) applies, it treats the non-resident as owing a portion of the amount owing to the partnership to each member of the partnership (on the same terms as that debt was owed to the partnership). Each member's portion of the debt is based on the fair market value of the member's interest in the partnership relative to the fair market value of all interests in the partnership. In the above scenario subsection 17(4) will deem XXXXXXXXXX to owe XXXXXXXXXX its proportionate share of Loan #1 and this proportionate amount may be subject to the rules in subsection 17(1) of the Act. Subsection 17(1) of the Act could also apply to the portion of Loan #1 deemed to be owed to any Canadian-resident corporations which form part of the remaining partners of XXXXXXXXXX.
Pursuant to paragraph 17(10)(a), XXXXXXXXXX is a CFA of XXXXXXXXXX as defined in subsection 17(15) of the Act. Provided XXXXXXXXXX is earning income from an active business as defined in subsection 95(1), clause 17(8)(a)(i)(A) of the Act could exempt the proportionate amount of Loan #1 owing to XXXXXXXXXX from the application of subsection 17(1). As indicated in your memorandum, unless XXXXXXXXXX can be considered a CFA of the Canadian-resident corporations which form part of the remaining partners of XXXXXXXXXX, these partners will be subject to the provisions of subsection 17(1) of the Act. This appears to be the deliberate result of the legislation and, in the absence of any clear indication to the contrary, the intended result from a policy perspective.
Application of Section 17 to Loan #2
Subsection 17(6) applies where a partnership owes an amount to any person, and treats each member of the partnership as owing, for the purposes of section 17, a portion of the amount owed by the partnership to the lender. As a result of subsection 17(6), XXXXXXXXXX and the non-related non-resident partners of XXXXXXXXXX will be each deemed to owe XXXXXXXXXX a portion of XXXXXXXXXX debt.
Subsection 17(2) will apply where a non-resident person owes an amount to a particular person and it is reasonable to conclude that the particular person extended credit to the non-resident person because a corporation resident in Canada loaned or transferred property directly or indirectly, to any person or partnership (not necessarily the particular person or partnership).
We agree with your analysis that subsection 17(2) of the Act could apply to the portion of Loan #2 owing to XXXXXXXXXX by the non-related non-resident partners of XXXXXXXXXX. However, in our view, the provisions of paragraph 17(3)(b) may apply to exempt Loan #2 from the application of subsection 17(2) of the Act.
The paragraph 17(3)(b) exception focuses on the amount owing to the particular person by the non-resident borrower-debtor. In order to fall within this exception, the following three conditions must be satisfied:
i. The non-resident person and the particular person must not be related.
ii. The terms and conditions of the amount owing by the non-resident borrower-debtor to the lender must be arm's-length. This determination must be made without reference to any loan or transfer of property by a corporation resident in Canada to the particular person.
iii. If interest were payable on the amount owing, such interest would not be required to be included in the foreign accrual property income ("FAPI") of a foreign affiliate of the corporation resident in Canada.
In the above situation, the non-related non-resident partners of XXXXXXXXXX are not related to XXXXXXXXXX. It is also arguable, that where arm's-length persons have made similar interest-free loans to XXXXXXXXXX, the terms and conditions of Loan #2 should be viewed as being on arm's-length terms and conditions. Finally, clause 95(2)(a)(ii)(C) will treat the income of the affiliate as active business income of the affiliate to the extent that the interest paid or payable to the affiliate would be, if the partnership were a foreign affiliate of the taxpayer, deductible in computing the amount prescribed to be its earnings or loss from an active business carried on in a country other than Canada. It would appear from the information provided that all three conditions of the paragraph 17(3)(b) exemption could be satisfied with the result that subsection 17(2) would not apply to Loan #2.
Application of Section 17 to Loan Given by XXXXXXXXXX to XXXXXXXXXX (Loan #3)
The provisions of subsection 17(6) of the Act will deem XXXXXXXXXX and the non-related non-resident partners of XXXXXXXXXX to owe a portion of Loan #3 to XXXXXXXXXX. We agree with your conclusion that subsection 17(1) will apply to Loan #3 as none of the exceptions contained in subsections 17(7), 17(8) and 17(9) of the Act have been met. The "exempt loan" exception found in subsection 17(15) focuses on the relationship between the Canadian-resident corporation and the particular person and is only relevant for the purposes of subsection 17(2) of the Act. Although it may appear anomalous for section 17 to apply to a loan which has been made on arm's-length terms and condition, there is no corresponding unrelated, arm's-length terms and conditions test with respect to the application of subsection 17(1) of the Act.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
We trust our comments will be of assistance.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content