6 August 2014 External T.I. 2014-0519431E5 - Section 15(2.12)

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. Whether a CRIC is required to file an amended tax return on filing a late-filed PLOI election under 15(2.12)? 2. When will arrears interest be assessed on the income inclusion under subsection 17.1(1) as a result of the late-filed PLOI election? 3. Where a PLOI election is available but is not yet filed, when will the CRA assess withholding tax on the deemed dividend amount?

Position: 1. No. 2. From the balance-due day of each affected taxation year. 3. Normally when the subsection 15(2.6) period has elapsed without repayment and a determination of whether a deemed dividend is received by the non-resident can be made.

Reasons: 1. A valid late-filed PLOI election gives effect to the tax consequences to be assessed. 2. The late-filed PLOI election deems the loan to be treated as if it were a PLOI from day one. Arrears interest calculated under subsection 161(1) of the Act will accrue on the additional tax owing by the CRIC from the balance-due day of each affected taxation year. 3. The CRA should assess the Part XIII withholding tax on the deemed dividend when the CRA would normally do so. If a late-filed PLOI election is subsequently made, the tax liability would be reassessed at that time.

XXXXXXXXXX
2014-051943
J. Ouimet, CPA, CA
August 6, 2014

Subject: Section 15(2.12)

Dear XXXXXXXXXX:

We are writing in reply to your email of January 27, 2014, requesting our views on certain administrative practices when a pertinent loan or indebtedness ("PLOI") election is made under paragraph 15(2.11)(d) of the Income Tax Act (the "Act"). We apologize for the delay in responding.

You have described a situation where a loan becomes owing to a corporation resident in Canada (the "CRIC") by the CRIC's non-resident parent corporation. A PLOI election under subparagraph 15(2.11)(d)(i) of the Act is jointly filed in respect of the loan after the end of the second year after the taxation year of the CRIC in which the amount became owing, but before the end of its third taxation year. The election meets all the late-filing rules of subsection 15(2.12) of the Act.

Specifically, you have asked for our comments in relation to the following questions:

1. Is the CRIC required to file an amended corporate tax return on filing a late-filed PLOI election under subsection 15(2.12) to reflect the additional interest income arising from subsection 17.1(1) of the Act?

2. Will the Canada Revenue Agency ("the CRA") assess interest on the income inclusion under subsection 17.1(1) from day one of the loan because of the late-filed PLOI election?

3. Where a PLOI election could be made, but is not yet filed, will the CRA assess Part XIII withholding tax on the loan amount after the end of the second taxation year, or wait until after the three year period permitted to file the election under subsection 15(2.12) has ended?

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act. 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.

In general, where a loan or indebtedness (to which subsection 15(2) would otherwise apply) becomes owing after March 28, 2012, a joint election to treat such loan or indebtedness as a PLOI can be filed under paragraph 15(2.11)(d) (if all the requirements are met), to exclude the loan or indebtedness from the application of subsection 15(2). The PLOI election is available where the loan or indebtedness becomes owing to a CRIC by a subject corporation that is either a non-resident corporation that controls the CRIC or a non-resident corporation that does not deal at arm's length with the controlling corporation.

The result of being a PLOI is that the amount owing, instead of potentially being treated as a deemed dividend under the combined operation of subsections 15(2) and 214(3) of the Act resulting in the application of Part XIII withholding tax under subsection 212(2), will be subject to the rules set out in subsection 17.1(1) requiring the CRIC to include in income a taxable interest inclusion. Furthermore, the non-resident parent corporation, in cases involving low interest loans or indebtedness, would also be subject to a taxable interest benefit calculated under subsection 80.4(2).

In regard to your specific questions, we offer the following general comments:

1. Is the CRIC required to file an amended corporate tax return on filing a late-filed PLOI election under subsection 15(2.12) to reflect the additional interest income arising from subsection 17.1(1)?

In order for a particular amount owing to be a PLOI under subsection 15(2.11), an election in respect of the amount owing must be filed with the Minister of Revenue in writing on or before the filing-due date of the CRIC for the taxation year in which the amount became owing (or, for the purposes of subparagraph 15(2.11)(d)(ii), on or before the filing-due date of the CRIC for its taxation year in which ends the fiscal period of the qualifying Canadian partnership in which the amount became owing).

In addition, pursuant to subsection 15(2.12), an election filed under subsection 15(2.11) is deemed to be valid provided it is made within three years from the applicable filing-due date and the penalty under subsection 15(2.13) is paid, equal to $100 for each month, or part thereof, that the filing is late.

In our view, a valid PLOI election must refer to a specific amount owing and include the details indicated on CRA's website, Pertinent loans or indebtedness, http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/pymnts/ntrst/lns-eng.html.

You may also wish to include a calculation of the change in income of each affected taxation year. Accordingly, the election will contain enough information to enable the CRA to assess the tax consequences. Therefore, in our view the CRIC would not be required to file an amended corporate tax return in addition to filing a valid PLOI election.

2. Will the CRA assess interest on the income inclusion under subsection 17.1(1) from day one of the loan because of the late-filed PLOI election?

The effect of filing the PLOI election is to consider the amount owing to be a PLOI from day one, and subject to subsection 17.1(1) and not subsection 15(2). Accordingly, arrears interest calculated under subsection 161(1) of the Act will accrue on the additional tax owing by the CRIC from the balance-due day of each affected taxation year. We note that instalment interest could also be impacted by the election.

3. Where a PLOI election is available, but not yet filed, will the CRA assess Part XIII withholding tax on the loan amount after the end of the second taxation year, or wait until after the three year period permitted to file the election under subsection 15(2.12) has ended?

With respect to when the CRA will assess the withholding tax on the deemed dividend, subsection 15(2.6) of the Act generally provides that subsection 15(2) does not apply to a loan repaid within one year after the end of the taxation year of the lender in which the loan was made where there is no series of loans or other transactions and repayments. Therefore, in our view an assessment of the Part XIII withholding tax on the deemed dividend would not normally be made until the subsection 15(2.6) period has elapsed without repayment (assuming that there is no series of loans or other transactions and repayments), and a determination of whether a deemed dividend is received by the non-resident can be made.

Where a taxpayer may file any election, but has not done so, the CRA is required to assess on the basis that no election has been filed. Therefore, in our view, where a PLOI election is available but is not yet filed, the CRA should assess the Part XIII withholding tax on the deemed dividend when the CRA would normally do so. If a late-filed PLOI election is subsequently made, the tax liability would be reassessed at that time.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch