8 September 2014 External T.I. 2013-0482991E5 - 15(2) and related provisions

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: 1. Does the transfer of a debt to which 15(2) attaches to a foreign corporate parent in repayment of another debt constitute repayment of the debt to which subsection 15(2) attaches?
2. Is an amount that would be refundable under subsection 227(6.1) available for appropriation under subsection 221.2(1) if the time for a refund under 227(6.1) has expired?
3a. If a pre-March 28, 2012, loan otherwise has all the characteristics of a PLOI would subsection 15(2) still apply? 3b. If so, can the debt be replaced with a post-March 28, 2012, debt in order to make a PLOI election and take advantage of one or more of subsections 15(2.6) or 227(6.1).

Position: 1. No.
2. Yes, but only by the non-resident Part XIII taxpayer, and only if no refund becomes available.
3a. 15(2) still applies. 3b. The requirements of 15(2.6) and 227(6.1) may not be met.

Reasons: 1. Assumption of the debt receivable by another party is not considered payment of the debt by the borrower.
2. Words of the Act state to whom the tax applies and who may request a refund or appropriation. Appropriation should not be allowed to circumvent the statute barring of refunds.
3a. The limitations set by Parliament must be respected. 3b. The transaction may constitute part of a series of loans or other transactions and repayments.

XXXXXXXXXX
2013-048299
Eli Kae Moore

September 8, 2014

Dear XXXXXXXXXX,

Re: Subsection 15(2) and related provisions

We are responding to your email of March 25, 2013, in which you posed the following queries involving subsection 15(2) of the Income Tax Act along with several other related provisions:

1. Suppose that Debtco, a non-resident corporation, becomes indebted to Canco, a corporation resident in Canada, which is wholly owned by Parentco, a non-resident corporation. Further suppose that Debtco is connected with Parentco (for the purposes of subsection 15(2)) and that Canco has an existing debt that it owes Parentco. If Canco repays its debt to Parentco by assigning its debt receivable from Debtco to Parentco within one year after the end of Canco's taxation year in which Debtco became indebted to Canco, would subsection 15(2.6) apply to prevent an income inclusion under subsection 15(2)?

2. Suppose instead that Debtco repays its debt to Canco but only in the second year after the end of Canco's taxation year in which the debt arose. Further suppose that Debtco does not apply for a refund within the time required under subsection 227(6.1). May the amount that would otherwise be refundable under subsection 227(6.1), had Debtco applied within the time required, be re-appropriated to a future amount of tax owing under subsection 221.2(1)?

With the introduction of subsections 15(2.11) to (2.13) any new loan or indebtedness that becomes owing from Debtco to Canco after March 28, 2012, may be a "pertinent loan or indebtedness" (a "PLOI") and subsection 15(2) would not apply to the new loan or indebtedness. Suppose that the debt which Debtco owes Canco and which became owing before March 28, 2012, bears interest at a rate equal to or greater than the prescribed interest rate for section 17.1. Would subsection 15(2) still apply to the pre-March 28, 2012 indebtedness even though it is otherwise consistent with the meaning of a PLOI in subsection 15(2.11)? If so, where Debtco replaces its pre-March 28, 2012, indebtedness to Canco with a new loan or indebtedness to Canco would this constitute a "series of loans and repayments?"

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Unless otherwise stated, all statutory references in this letter are to the Income Tax Act, as amended.

Our Comments

Absent subsection 15(2.6), subsection 15(2) would cause Debtco to have, in the year it became indebted to Canco, an income inclusion equal to the amount of the indebtedness to Canco. This income inclusion would then be deemed under paragraph 214(3)(a) to be a dividend from a corporation resident in Canada. Debtco would owe tax under Part XIII of the Act in respect of this deemed dividend and Canco would be required to withhold and remit the tax under section 215.

If subsection 15(2.6) were to apply then subsection 15(2) would not apply, there would be no deemed dividend under paragraph 214(3)(a) and no withholding and remittance of Part XIII tax would be required under section 215.

To answer your first question, absent novation of the debt, it is our view that Canco's assignment of its debt receivable from Debtco to Parentco would not constitute repayment of the debt by Debtco to Canco for the purposes of subsection 15(2.6). Since the debt would not be repaid as required under subsection 15(2.6), subsection 15(2) would continue to apply and the Part XIII tax imposed pursuant to paragraph 214(3)(a) would also remain. For the same reason, the assignment would not constitute repayment for the purposes of subsection 227(6.1). If on the other hand, the debt was novated, but it was novated in order to avoid the tax consequences inherent in the application of subsection 15(2) of the Act and not primarily for bona fide non-tax purposes, section 245 may apply to ensure the continued application of subsection 15(2), and consequently paragraph 214(3)(a).

To answer your second question, in the situation of Debtco having repaid Canco but not having applied for a refund of the amount withheld and remitted within the timeframe required under subsection 227(6.1), an amount could be available for the Minister to re-appropriate, upon approving an application by Debtco under subsection 221.2(1). In such a situation it is important to note that the tax payable under Part XIII is that of Debtco (i.e., the non-resident) which would have been withheld and remitted by Canco on Debtco's behalf. Therefore re-appropriation under subsection 221.2(1) in respect of the amount would be available to Debtco, not Canco, and only to the extent that Debtco were to have an amount that is or may become payable for the purposes of the subsection.

Notwithstanding the above, there is no situation where re-appropriation under section 221.2 is available when the re-appropriation would result in the refund of an amount contrary to legislated time limits (such as in subsections 227(6) or (6.1) and section 164). In addition, there are currently no provisions of the Act or the Income Tax Regulations which divest the payor (e.g., Canco) of their obligations under section 215 in respect of situations like the one described. It is, therefore, unclear to us the precise situation for which re-appropriation under subsection 221.2(1) could be granted in respect of a future amount of tax payable under Part XIII in a manner that would not result in a refund.

We would also note that, in a situation where Debtco had not repaid its debt to Canco within the time specified in subsection 15(2.6) (such as the situation you described in your second question) but Canco had not withheld and remitted an amount as required by section 215, both Canco and Debtco would remain liable for the Part XIII tax outstanding and any interest on the same. In addition, Canco would be subject to penalties for the failure to remit and the directors of Canco may also become liable for any unpaid Part XIII tax, plus interests and penalties pursuant to section 227.1. In such a situation Canco could consider applying for relief through a "Voluntary Disclosure" as set out in Information Circular 00-1R4 in order to request relief from penalties and interest.

To answer your third question, it is our view that Parliament's specific requirement that an amount become owing after March 28, 2012, as set out in paragraph 15(2.11)(b), in order for the amount to qualify for PLOI treatment must be respected. Therefore, even if a pre-March 28, 2012, debt had been structured so as to otherwise resemble a PLOI, subsection 15(2) would continue to apply to the debt. It is also our view that, if a pre-March 28, 2012, debt is replaced with a newer debt of the same or substantially similar amount, the transactions may constitute a series of loans or other transactions as discussed in ¶ 28 of IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders. However, as discussed in ¶ 29 of IT-119R4, in any given situation, all of the relevant factors would need to be considered to determine whether a series of loans or other transactions and repayments existed and bona fide repayments would not be seen as part of a series of loans or other transactions and repayments.

We trust our comments will be of assistance.

Yours truly,

Lori M. Carruthers CPA, CA
International Section III
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch