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: A.) Is the provision of a guarantee for no fee on the debt of a subject corporation by a CRIC a benefit conferred on the subject corporation and therefore an "investment" under 212.3(10)(b)? B.) Are there instances where the provision of a guarantee by the CRIC for no fee will not be a conferral of a benefit? C.) If the provision of the guarantee for no fee is a conferral of a benefit, what is the quantum of the benefit? D). Can CRA comment on the result of unavailability of a PUC reinstatement under subsection 212.3(9) upon payment of the underlying debt by the subject corporation?
Position: A). Yes. B). Possibly, where FMV consideration has otherwise been given and terms are identical to those of an arm's length transaction. C). Question of fact specific to each case, the fair market value of the benefit/investment at the time the benefit is conferred/investment is made. D). The result is not anomalous.
Reasons: A). Words of the Act and purpose of the provision. B). Prior CRA positions. C). Question of fact specific to each situation. D). The provision is intended to act as a deterrent.
IFA Roundtable, May 2014 Question 1
Question 1: Application of the Foreign Affiliate Dumping Rules to CRIC Guarantees
Assume that Canco, a corporation resident in Canada, is majority (but not wholly) owned and controlled by Parent, a non-resident corporation, with the remainder of its shares being held by one or more persons at arm's length with Parent and Canco. Forco is a controlled foreign affiliate of Canco that carries on an active business in a country other than Canada. A non-resident entity related to Parent lends money to Forco for use in its active business. The Forco debt is guaranteed by Canco but no guarantee fee is charged or paid.
Assume that subsection 247(7.1) will apply so that there is no adjustment under subsection 247(2) for the nil guarantee fee.
Paragraph 212.3(10)(b) defines "investment" to include a contribution of capital to Forco by Canco, which is deemed to include any transaction or event under which a benefit is conferred on Forco by Canco. Does the provision of the guarantee by Canco for no fee constitute a conferral of a benefit so that there is an "investment" under subsection 212.3(10)?
Subsection 212.3(10) of the Act defines "investment" for the purposes of the section. Pursuant to paragraph 212.3(10)(b) an "investment" includes a contribution of capital to a subject corporation by a CRIC, and a contribution of capital is deemed to include a benefit conferred on a subject corporation by a CRIC. Where there is a benefit conferred on a subject corporation by a CRIC there is an "investment" for the purposes of section 212.3. In all cases, the existence of a benefit conferred for the purposes of paragraph 212.3(10)(b) is a question of fact that can only be determined after a review of all of the facts and circumstances applicable to a particular situation.
When considering the facts and circumstances applicable to a particular guarantee for no fee, CRA is of the view that the treatment of benefits conferred for the purposes of subsection 15(1) is informative for the purposes of subsection 212.3(10) because of the similar language used in the two subsections as well as the intent expressed in the Department of Finance's explanatory notes to subsections 212.3(2) and (10). While subsection 15(1) applies to benefits conferred by a corporation on a shareholder and subsection 212.3(10) addresses "benefits conferred on the subject corporation by the CRIC," this inversion of the corporate-shareholder relationship does not preclude the analysis of what may constitute a benefit under subsection 15(1) from being informative for the purposes of paragraph 212.3(10)(b). In CRA's opinion, scenarios resulting in a benefit under subsection 15(1) will often have the parallel result for the purposes of paragraph 212.3(10)(b) if the benefit were to flow in the other direction.
More specifically, just as it has been CRA's longstanding position that a corporation guaranteeing the debt of a shareholder for no fee can be viewed as the conferral of a benefit for the purposes of subsection 15(1), in the inverse situation where a CRIC guarantees the debt of a subject corporation for no fee, CRA is of the view that there can be a benefit conferred for the purposes of paragraph 212.3(10)(b).
The October 15, 2012 Technical Notes to paragraph 212.3(10)(b) indicate that benefit conferral is to be interpreted in a manner consistent with its interpretation in the context of shareholder benefits in subsection 15(1). In the subsection 15(1) context, the CRA has stated limited circumstances in which no benefit will apply where a corporation guarantees a shareholder's debt, namely where the shareholder is dealing at arm's length with the corporation and there is no evidence that the shareholder is, at the time the guarantee is granted, unable to repay the debt (see CRA Views, Conference, 2006-0174011C6, "Guarantee and shareholder benefits" dated 29 June 2006). The arm's length condition cannot be satisfied in the Canco Forco case.
In the case of the Forco debt, Canco is guaranteeing the debt of its subsidiary and, arguably, is not conferring a benefit on Forco, since Canco benefits from Forco's access to debt capital. Can the CRA comment on whether, and in what circumstances, it would consider the provision of the guarantee by Canco for no fee not to be a conferral of a benefit for purposes of paragraph 212.3(10)(b)?
Since the issue of whether a benefit is conferred is a question of fact, so too is the issue of whether in a particular situation no benefit is conferred. Again, previous guidance on subsection 15(1) may be informative. Based on prior CRA positions in respect of subsection 15(1), in the case of a CRIC providing a guarantee on the debt of a subject corporation for no fee, CRA would generally not view the provision of such a guarantee as the conferral of a benefit if fair market value consideration were otherwise given in exchange for the guarantee and it would be reasonable in the circumstances to conclude that a party dealing at arm's length would provide the guarantee on the same terms.
If such guarantee does constitute an "investment", can the CRA comment on what the quantum of that "investment", would be? For example, would it be the NPV of an arm's length guarantee fee over the life of the loan?
While paragraph 212.3(10)(b) is silent as to the value of the benefit, the quantum or value of the benefit conferred is important for the purposes of paragraph 212.3(2)(a) which states in part:
[T]he CRIC is deemed to have paid to the parent, and the parent is deemed to have received from the CRIC, at the investment time, a dividend equal to the total of all amounts each of which is the portion of the fair market value at the investment time of any property (not including shares of the capital stock of the CRIC) transferred, any obligation assumed or incurred, or any benefit otherwise conferred... .
From the wording of paragraph 212.3(2)(a) it is evident that the quantum of the benefit, which is considered to be a contribution of capital under the definition of "investment," is the fair market value of the benefit at the time the investment is made (i.e., when the benefit is conferred).
Determining the fair market value of a guarantee provided for no fee is a factual determination and can only be made in the context of the specific guarantee provided.
If such guarantee does constitute an "investment", further assume that the resulting deemed dividend is reduced to nil by virtue of the PUC grind permitted under subsection 212.3(7). It appears that no PUC reinstatement would be permitted on the repayment in full of Forco's loan. There could therefore be multiple, cumulative PUC grinds arising as a consequence of future Forco loans guaranteed by Canco without a fee even if only one such debt is outstanding at any given time. Can CRA comment on this apparent anomalous result?
Where a subsection 212.3(2) deemed dividend has been triggered by a foreign controlled CRIC providing a guarantee for no consideration in respect of a subject corporation's debt and the deemed dividend was reduced by a reduction of PUC under subsection 212.3(7), the mere repayment of the underlying debt (which would relieve the foreign controlled CRIC of its guarantee obligations) would not satisfy the requirements of subsection 212.3(9) in order to reinstate the PUC. In CRA's view, this is not an anomalous result but the clear and intended operation of subsection 212.3(9) and paragraph 212.3(9)(c) in particular, based both on the provision's text and the explanatory notes to section 212.3 which indicate that the section is meant to operate as deterrent to certain corporate investment structures.
That being said, there remains the possibility for the CRIC to benefit from a PUC reinstatement under subsection 212.3(9) because, to the extent the CRIC demonstrates that, after providing the guarantee for no fee (the "investment") and no more than 180 days before it reduces the PUC in respect of the class of its shares for which, in respect of the "investment," an amount is required by paragraph 212.3(7)(b) to be deducted in computing the PUC, it has received dividends or a qualifying return of capital in respect of shares of the capital stock of the subject corporation, there would be an amount for the purposes of subparagraph 212.3(9)(c)(ii). In summary, the fact that paragraph 212.3(10)(b) treats a benefit conferred on a subject corporation as a contribution of capital and, therefore, as an "investment" even though no payment of capital was actually made does not, in and of itself, prevent the PUC reinstatement rules in subsection 212.3(9) from being applicable.
Eli Kae Moore
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