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 "at all times" condition in paragraph 95(2)(i) is not satisfied in certain circumstances.
Position: Question of fact.
Reasons: Previous CRA position. Document 95-5293.
IFA Roundtable, May 2014 Question 4
Question 4: "At all times"
Paragraph 95(2)(i) provides that any income, gain or loss of a foreign affiliate debtor is deemed to be income, gain or loss from the disposition of excluded property if it arose on the settlement or extinguishment of certain debts. The provision requires, generally, that all or substantially all of the proceeds of the debt must be used at all times to earn income from an active business carried on by the debtor or to acquire property that is excluded property at all times that the debt is outstanding.
a. In many cases, there is a short period of time after money is borrowed and before it can be employed in the business or to acquire excluded property. This period may be as little as a day in some cases. Would earning interest on the borrowed money for such a period of time cause this provision to be inapplicable (for example, interest on a bank account or term deposit)?
b. In other circumstances, the borrowed money may be used to acquire property such as shares that does not qualify as excluded property for a very short period of time. Immediately after the acquisition, the taxpayer takes steps to ensure that the shares qualify as excluded property by, for example, disposing of non-qualifying assets. Would this cause this provision to be inapplicable?
CRA Response
a. The CRA previously commented on the application of paragraph 95(2)(i) in the context of a hypothetical situation in which a foreign affiliate deposited proceeds from the disposition of excluded property into a bank account prior to repaying a debt which had originally been used to acquire the excluded property. (Document No: 95-5293).
Our view continues to be that whether the "at all times" requirement is met is a matter of fact that can only be decided with full knowledge of all the particulars of the situation. The fact that there is a brief period of time after the receipt of borrowed funds when a debt is incurred and their deployment for a qualifying purpose or after the receipt of proceeds on disposition of excluded property and the use of those proceeds for the repayment of a related debt would not automatically prevent paragraph 95(2)(i) from applying to deem the income, gain or loss from the settlement or extinguishment of the debt to be from the disposition of excluded property. However, in our view for paragraph 95(2)(i) to apply notwithstanding such delay, the taxpayer should be prepared to establish that the brief delay could not practically have been avoided and was not attributable to financial considerations like a desire to earn a return from a non-qualifying investment, to avoid temporary cash flow issues or because of exchange rate considerations.
b. We assume your question is in the context of third party acquisitions as it is presumed that related parties can structure their affairs in a manner that avoids this issue.
With regard to third party acquisitions, there is generally an expectation that non-qualifying assets will be identified during the acquisition due diligence process and, if desired, steps can be undertaken to restructure or dispose of non-qualifying assets as part of the pre-acquisition structuring or immediately after the acquisition. If the taxpayer takes steps to ensure that the shares qualify as excluded property immediately after the acquisition, for example by disposing of non-qualifying assets, and such shares qualify as excluded property within the same day they are acquired and the related debt has been incurred, we would consider paragraph 95(2)(i) to apply.
Julia Belova
2014-052677
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