26 November 2001 External T.I. 2001-0107145 - Interaction between 17(7) and 227(6.1)

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: How does subsection 17(1) of the Act work where a non-resident refunds in year 8 an amount that he has been owing since year 1 and applies under subsection 227(6.1) of the Act for a refund of Part XIII?

Position: Subsection 17(7) of the Act provides that Part XIII tax is deemed never to have been paid on the loan. Therefore, subsection 17(1) of the Act may technically apply to the amount owing from the time that the amount first became outstanding. Thus, as the loan was interest-free, a deemed interest calculated at the prescribed rate has to be included in the Canadian-Resident Corporation for each taxation year. However, because some of those years are beyond the normal reassessment period CCRA can only reassess taxation year that are within the reassessment period.

Reasons: Wording of the Act.

XXXXXXXXXX 2001-010714

J. Desparois, M.Fisc.

November 26, 2001

Dear XXXXXXXXXX:

Re: Subsection 17(7) of the Income Tax Act

This is in reply to your letter of October 11, 2001, requesting our views regarding the interaction between subsections 17(1), 17(7) and 227(6.1) of the Income Tax Act (the "Act") in the following hypothetical situation.

1. A Canadian resident corporate taxpayer loans, without interest, money to a non-resident shareholder in year 1.

2. The loan is subject to Part XIII by virtue of subsection 15(2) and paragraph 214(3)(a) of the Act.

3. The first repayment of the loan is made in year 8.

4. The non-resident shareholder applies in year 8 for a refund of Part XIII under subsection 227(6.1) of the Act.

You would like to know how section 17 of the Act works in these circumstances and if the taxpayer includes in its income the accrued interest income from the inception of the loan under subsection 17(1) for open taxation years.

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.

Subsection 17(1) of the Act generally applies where a non-resident person owes an amount to a Canadian-resident corporation 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. Where subsection 17(1) applies, the corporation is required to include in its income for the year an amount equal to the amount by which interest on the amount owing, computed at a prescribed rate for the period in the year during which the amount owing, exceeds, inter alias, the interest otherwise received for the year.

Subsection 17(7) of the Act provides that, where a non-resident owes an amount to a corporation resident in Canada and Part XIII tax has been paid on the amount owing, subsection 17(1) of the Act does not apply to the amount owing. However, if a portion of the amount owing is repaid, which would give rise to a refund of tax under subsection 227(6.1) of the Act, tax will be deemed never to have been paid under Part XIII on that portion of the amount owing. Consequently, as mentioned in the Technical Notes to Bill C-72 (Royal Assent June 17, 1999 S.C. 1999, c. 22) published by the Department of Finance, subsection 17(1) of the Act may apply to the amount owing from the time that the amount first became outstanding.

Without subsection 17(7) of the Act, subsection 17(1) of the Act applies to the hypothetical situation described above as a Canadian-resident corporation has made an interest-free loan to a non-resident shareholder and the loan has remained outstanding for more than one year. However, pursuant to subsection 17(7) of the Act and until the amount owing is repaid, subsection 17(1) is not applicable in respect of an amount owing where Part XIII tax has been paid on the amount owing by the non-resident to the Canadian-resident Corporation. In year 8 the loan is repaid and the non-resident shareholder applies for a refund under subsection 227(6.1) of the Act for the Part XIII tax paid in respect of that amount. Consequently, pursuant to subsection 17(7) of the Act, Part XIII tax is deemed never to have been paid on the loan. Therefore, subsection 17(1) of the Act may technically apply to the amount owing from the time that the amount first became outstanding. Thus, as the loan was interest-free, a deemed interest calculated at the prescribed rate has to be included in the Canadian-resident corporation for each taxation year. However, because some of those years are beyond the normal reassessment period¹ the Canada Customs and Revenue Agency can only reassess taxation years which are within the reassessment period. Subparagraph 152(4)(b)(iii) of the Act provides for an extended reassessment period of six years from the date of mailing of the original notice of assessment where there is reason, as a consequence of a transaction involving the taxpayer and a non-resident person with whom he was not dealing at arm's length, to assess or reassess the taxpayer's tax for any taxation year.

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.

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

ENDNOTES

¹ As defined under subsection 152(3.1) of the Act.