2 October 2014 External T.I. 2013-0506551E5 - Transitioning from 15(2) to a PLOI

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: If a PLOI is part of a series of loans or other transactions and repayments that includes the repayment of a pre-March 29, 2012 loan, would the original loan be subject to subsection 15(2) and non-resident withholding, despite the income imputation in respect of the PLOI pursuant to subsection 17.1(1)?

Position: Yes, but 17.1(1) would not apply in respect of the new loan

Reasons: A PLOI election in respect of the new loan cannot be made or would be invalid because the requirement in paragraph 15(2.11)(a) would not be met.

XXXXXXXXXX
Julia Belova
2013-050655

October 2, 2014

Re.: Subsection 15(2.11) Series of Loans

We are writing in response to your email dated September 26, 2013.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") and every reference herein to a section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act.

You asked for our views regarding the ability to transition a subsection 15(2) loan made to a non-resident person prior to March 29, 2012 ("Original Loan") to the pertinent loan or indebtedness ("PLOI") regime by repaying the loan and re-lending the same amount after March 28, 2012 such that the new loan ("New Loan") would qualify for a PLOI election under subsection 15(2.11).

On the assumption that the Original Loan and the New Loan are part of a series of loans or other transactions and repayments within the meaning of subsection 15(2.6), you asked whether the CRA would seek to impose Part XIII withholding tax in respect of the principal amount of the Original Loan despite the fact that the New Loan would be a PLOI and there would be income imputation in respect of the New Loan pursuant to subsection 17.1(1).

Our comments

This technical interpretation provides general comments about the provisions of the 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 70-6R6, Advance Income Tax Rulings. Subsection 15(2.6) provides that subsection 15(2) does not apply where a loan or indebtedness is repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or indebtedness arose, but this exception does not apply where the repayment is part of a series of loans or other transactions and repayments ("Series of Loans").

A PLOI is not excluded from a Series of Loans for the purposes of subsection 15(2.6). Such exclusion would have permitted the transition of loans or indebtedness in existence prior to March 29, 2012 into the PLOI regime. Paragraph 15(2.11)(b) provides clearly that the PLOI regime shall apply only to loans received and indebtedness incurred after March 28, 2012. Therefore, we are of the view that only new, post-March 28, 2012 loans or indebtedness that are not part of a Series of Loans that include the repayment of a pre-March 29, 2012 loan or indebtedness can benefit from the PLOI regime.

In the hypothetical scenario described above, if the repayment of the Original Loan was part of a Series of Loans that included the New Loan, subsection 15(2) would apply to the Original Loan and, consequently, the CRA would seek to impose Part XIII withholding tax in respect of the Original Loan pursuant to subsections 214(3) and 212(2).

However, where subsection 15(2) and consequently Part XIII withholding tax had applied to a loan or indebtedness that is part of a Series of Loans, it will not apply again to the same amount of another loan or indebtedness in the Series of Loans. (footnote 1) Therefore, subsection 15(2) would not apply in respect of the New Loan such that the requirement in paragraph 15(2.11)(a) that the loan otherwise be subject to subsection 15(2) will not be satisfied. As such, the PLOI election in respect of the New Loan cannot be made or, if it was made, it would be considered invalid with the result that no interest income under subsection 17.1(1) would be imputed to the Canadian lender in respect of the New Loan.

We trust these comments to be of assistance.

Yours truly,

Olli Laurikainen, CPA, CA
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. This result is consistent with the spirit and object of subsection 15(2) and the CRA's administrative practice, as reflected in the IT-119R4.