19 May 2005 External T.I. 2004-0072331E5 - Whether 17(2) applies

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.

Principal Issues: Whether 17(2) applies in the situation described

Position: Probably

Reasons: Request must be resubmitted as a request for an advance income tax ruling, but on its face, it appears that the scenario meets the conditions in 17(2).

XXXXXXXXXX 2004-007233
S. E. Thomson
May 19, 2005

Dear XXXXXXXXXX:

Re: Application of subsection 17(2)

This is in reply to your letter of April 20, 2004 regarding the application of subsection 17(2) of the Income Tax Act (the "Act") to the scenario described below. We apologize for the delay in responding to your query. We have simplified the facts as you have described them to us to focus on the question at issue.

Forco1 is a corporation resident in a country other than Canada. Forco1 owns all of the shares of Canco, a corporation resident in Canada, and Forco2, a corporation resident in the same country as Forco1. Forco2 owns all of the shares of Forco3, a corporation resident in the same country as Forco1 and Forco2.

Forco2 wishes to sell all the shares of Forco3 to Canco. For foreign tax purposes, it is preferable if Forco2 first sells the shares of Forco3 to Forco1 in exchange for a note payable. Forco1 will then sell the shares to Canco for property that may include cash, shares and/or debt.

You would like to know if subsection 17(2) of the Act would apply to deem the note payable by Forco1 to Forco2 to be payable to Canco. If so, subsection 17(1) would apply to include interest on the note in Canco's income.

OUR COMMENTS

Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request involves a series of transactions contemplated by specific taxpayers. As such, we are precluded from commenting on your situation except in the context of an advance income tax ruling. However, we are able to offer the following general comments regarding the relevant provisions of the Act. Since these comments are general in nature, they may or may not apply in your situation, and accordingly, are not binding on the Canada Revenue Agency.

Subsection 17(2) provides as follows:

For the purpose of this section and subject to subsection (3), where

(a) a non-resident person owes an amount at any time to a particular person or partnership (other than a corporation resident in Canada), and

(b) it is reasonable to conclude that the particular person or partnership entered into the transaction under which the amount became owing or the particular person or partnership permitted the amount owing to remain outstanding because

(i) a corporation resident in Canada made a loan or transfer of property, or

(ii) the particular person or partnership anticipated that a corporation resident in Canada would make a loan or transfer of property,

either directly or indirectly, in any manner whatever, to or for the benefit of any person or partnership (other than an exempt loan or transfer), the non-resident person is deemed at that time to owe to the corporation an amount equal to the amount owing to the particular person or partnership.

In the facts presented, it is reasonable to conclude that Forco1 became indebted to Forco2 in anticipation of the transfer of property from Canco to Forco1 to purchase the shares of Forco3. Therefore, subsection 17(2) of the Act would apply to deem an amount equal to the note to be payable to Canco.

In our view, the transfer of property from Canco to Forco1 to purchase the shares of Forco3 would not be an "exempt loan or transfer" as that term is defined in subsection 17(15) of the Act. Paragraph (b) of that definition excludes a transfer of property that was made for the purpose of acquiring shares of the capital stock of a foreign affiliate of Canco.

We trust that we have been of some assistance.

Yours truly,

Olli Laurikainen, C.A., Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate