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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether subsection 15(1) applies to confer a benefit on a parent corporation when a wholly-owned subsidiary exchanges an interest bearing loan for a non-interest bearing loan held by another wholly owned subsidiary.
Position TAKEN: Question of fact. General comments given.
Reasons FOR POSITION TAKEN: Long-established departmental practice
XXXXXXXXXX 2001-010531
G. Moore
March 26, 2003
Dear XXXXXXXXXX:
Re: Exchange of Intercorporate Debts
This is in reply to your letter of September 24, 2001, regarding the exchange of debt instruments between wholly-owned subsidiaries of a single parent corporation.
You are requesting our views on whether a benefit is conferred on a parent corporation when one of its wholly-owned subsidiaries exchanges a debt owing by another of its wholly-owned subsidiaries. The example you provide is as follows: Corporations A and B are both wholly-owned subsidiaries of a single parent corporation. Corporation A advanced a loan to Corporation B with an interest rate of 10% and a term of 5 years. Corporation B encounters financial difficulty and, in order to avoid increasing its debt burden and enhancing its loss position, Corporation A will exchange the debt for a new debt of the same principal amount but bearing no interest and a term of two years. Section 51.1 of the Income Tax Act (the "Act") and paragraph 80(2)(h) of the Act deem this exchange to occur on a roll-over basis. Since the new debt has a lower fair market value than the old debt, you are asking if Corporation A has conferred a benefit under subsection 15(1) of the Act on the parent corporation by enhancing the value of the parent's shares of Corporation B. In addition, you are asking if subsection 56(4) of the Act would apply. It is your view that there should be no tax benefit assessed since you feel that the policy intent is that this debt exchange should be tax-deferred.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5 dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Under subsection 15(1) of the Act, the amount or value of a benefit conferred on a shareholder by a corporation in a taxation year is included in the shareholder's income for the year, except to the extent that the benefit is deemed by section 84 to be a dividend. A benefit conferred by a corporation can also be included under subsection 15(1) in the income of a person who at the time the benefit was conferred was not a shareholder, if it was contemplated that the person would become a shareholder. A determination of whether a benefit has been conferred on a shareholder as a result of intercorporate loans will depend on an examination of all of the relevant facts of a particular situation.
The Courts have held that a bona fide intercompany loan does not constitute a payment or transfer of property. For this reason, it is our view that generally, subsection 56(2) or 56(4) would not ordinarily be applicable in the circumstances outlined in your letter. In William Pitt Hotel Ltd. v. M.N.R., 64 DTC 224, the Court considered that advances made to shareholders were taxable pursuant to paragraph 8(1)(b) (now 15(1)). The appellant company did not successfully establish that the advances were loans made in the ordinary course of the business. In Fraser Companies Limited v. The Queen, 81 DTC 5051, the Court mentioned that the loan from the parent to the subsidiary was a contract between two separate entities in the course of business and a business contract and that a commercial contract was not the conference of a benefit.
Whether subsections 15(1), 56(2) or 56(4) of the Act would apply to a parent corporation in the example you described would be a question of fact which could only be determined after a review of all the pertinent facts. However, generally, where a debtor corporation is in financial difficulty such as in the situation you described, it is our view that the conversion of an interest-bearing intercorporate loan to a non-interest bearing intercorporate loan would generally not result in the application of subsections 15(1), 56(2) or 56(4) of the Act to the parent corporation provided the new debt is the same principal amount as the old debt, the corporate shareholder receiving the funds is or will be in a position to repay the loan or to provide reasonable security for repayment, and the loan is bona fide.
We trust that these comments will be of assistance.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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