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: Will subsection 17(2) apply to a "second loan" where the "first loan" bears a market rate of interest?
Position: Not if the proposed amendments to subsection 17(15) become law.
Reasons: Under proposed changes to subsection 17(15), such a loan would be an "exempt loan or transfer". Subsection 17(2) does not apply where the amount owing arose as a result of an exempt loan or transfer.
IFA Seminar - CCRA Round Table
May 7, 2001
(draft response)
Question 6
Section 17
At present, it is arguable that section 17 is capturing situations that may not have been intended. For example, where a corporation resident in Canada loans funds ("First Loan") at a market rate of interest to its non-resident parent that, in turn, loans the funds ("Second Loan") to a related non-resident corporation that is not a controlled foreign affiliate of the corporation resident in Canada, subsection 17(2) appears to apply in respect of the second loan.
In applying subsection 17(1) in such circumstances would the CCRA consider that a zero rate of interest is a reasonable rate for the Second Loan?
CCRA Response
The CCRA would not consider a zero rate of interest a reasonable rate for purposes of subsection 17(1). In the context of the above example, we point out that the March 2001 Notice of Ways and Means Motion includes an amendment to the definition of "exempt loan or transfer" in subsection 17(15). Under this amendment an exempt loan or transfer would include a loan made by a corporation resident in Canada where the interest rate charged on the loan is not less than the interest rate that a lender and a borrower would have been willing to agree to if they were dealing at arm's length with each other at the time the loan was made. Subsection 17(2) does not apply where the amount owing arose as a result of an "exempt loan or transfer".
We suggest that you refer to the Department of Finance particular cases where the application of the law has a result that may not be in accordance with tax policy.
Prepared by: Tim Kuss
File #: 2001-007802
Date: April 2001
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