24 July 2023 Internal T.I. 2020-0841891I7 - Upstream Loan

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 the Transactions undertaken by the Taxpayer resulted in a repayment of the Loan Payable for the purpose of paragraph 90(8)(a).

Position: The set-off of the Taxpayer’s Note against the Finance FA Note resulted in a repayment of the Loan Payable for the purpose of paragraph 90(8)(a).

Reasons: The wording of paragraph 90(8)(a) does not require the loan or indebtedness to be repaid to the original creditor that initially made the loan. Consistent with our prior position on subsections 15(2) and 227(6.1).

July 24, 2023

      Marian Young						HEADQUARTERS
      Senior Technical Specialist				Income Tax Rulings Directorate
      ILBD - ITD
      XXXXXXXXXXX						Ina Eroff

2020-084189

Upstream Loan - XXXXXXXXXX

This is in reply to your request for interpretive assistance regarding the application of the upstream loan rules in the described situation. We apologize for the delay in providing our response.

Unless otherwise stated, every statutory reference herein is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Facts:

The relevant facts are summarized below (the “Described Case”):

XXXXXXXXXX (the “Taxpayer”) is a “taxable Canadian corporation” for purposes of the Act. The Taxpayer has XXXXXXXXXX taxation year-end.

XXXXXXXXXX (“Lender FA”) was a corporation formed under the International Business Companies Act of XXXXXXXXXX and was a direct wholly-owned subsidiary of the Taxpayer. Lender FA was a corporation for purposes of the Act and for purposes of the laws of XXXXXXXXXX. Lender FA was a resident of XXXXXXXXXX, and was not a resident of Canada for purposes of the Act.

The adjusted cost base (“ACB”) of the shares of Lender FA to the Taxpayer was C$XXXXXXXXXX As of August 20, 2014, the exempt surplus of Lender FA was C$XXXXXXXXXX and its taxable surplus was C$XXXXXXXXXX.

XXXXXXXXXX (“Finance FA”) was a corporation formed under the laws of XXXXXXXXXX and was a direct wholly-owned subsidiary of the Taxpayer. Finance FA was a corporation for purposes of the Act and was a disregarded entity for United States of America (“U.S.”) tax purposes. Finance FA was a resident of the U.S. and was not a resident of Canada for purposes of the Act.

The ACB of the shares of Finance FA to the Taxpayer was C$XXXXXXXXXX. As of August 20, 2014, Finance FA had exempt surplus of C$XXXXXXXXXX and taxable surplus of XXXXXXXXXX.

Lender FA granted the Taxpayer non-interest bearing loans from XXXXXXXXXX for a total aggregate amount of US$XXXXXXXXXX (collectively, the “Loan Payable”). The Loan Payable was not made pursuant to any written agreement and was repayable on demand.

The Taxpayer entered into a series of transactions in order to settle the Loan Payable outstanding as of August 19, 2011. The main relevant transaction steps (the “Transactions”) were implemented as follows:

• On XXXXXXXXXX, the Taxpayer transferred all the shares of Lender FA to Finance FA in exchange for newly issued membership interests in Finance FA.
• On XXXXXXXXXX, in the course of the liquidation of Lender FA, Lender FA and Finance FA signed an Assignment and Assumption Agreement (the “A&A Agreement”), which was acknowledged by the Taxpayer. The A&A Agreement stipulated that:
• Lender FA assigned to Finance FA “all of its rights, title and interest in and to” the Loan Payable;
• Finance FA accepted the assignment and assumed all rights and obligations of Lender FA with respect thereto;
• From and after the date of the A&A Agreement, the Taxpayer had to make any payments in respect of the Loan Payable to Finance FA.
• On XXXXXXXXXX, Lender FA completed its liquidation and dissolution into its sole shareholder, Finance FA.
• On XXXXXXXXXX, the Taxpayer issued an Amended and Restated Intercompany Subordinated Demand Promissory Note (the “Taxpayer’s Note”) to Finance FA in the amount of US$XXXXXXXXXX. The Taxpayer’s Note was a demand non-interest bearing promissory note with a maturity date of XXXXXXXXXX, governed by the laws of XXXXXXXXXX. The Taxpayer’s Note stipulated that it amended and restated the Loan Payable to evidence that the obligations owed by the Taxpayer to Lender FA became owed to Finance FA. The Taxpayer’s Note further stipulated that it evidenced a continuation of the existing liability owed by the Taxpayer to Finance FA under the Loan Payable and did not constitute a novation of the Loan Payable.
• On XXXXXXXXXX, Finance FA declared a dividend to the Taxpayer in the amount of C$XXXXXXXXXX (a Canadian dollar equivalent of US$XXXXXXXXXX). Finance FA satisfied the payment of the dividend by issuing a non-interest bearing subordinated demand promissory note in the amount of US$XXXXXXXXXX with the maturity date of XXXXXXXXXX (the “Finance FA Note”).
• On XXXXXXXXXX, the Taxpayer’s Note and the Finance FA Note were offset and settled by way of entering into a Set-Off of Notes Agreement.

The Taxpayer did not file an election, pursuant to the coming-into-force provision with respect to the introduction of subsections 90(6.1) and (6.11) with the Minister of National Revenue before 2017 to allow these subsections to apply as of August 20, 2011.

Issues:

You requested our assistance with respect to the following interpretive issues:

1. Whether the Transactions resulted in a repayment of the Loan Payable for the purpose of paragraph 90(8)(a).

2. If the answer to issue 1 above is negative, whether there is any relief available under subsection 248(28)?

3. If the answers to issues 1 and 2 are both negative, can the Taxpayer rely on the tax attributes available in Finance FA as of August 20, 2014 – the time the Loan Payable was deemed to be made – to reduce the amount of income inclusion pursuant to subsection 90(9)?

Our Response:

Subsection 90(6) generally applies to include an amount in income of a corporation resident in Canada where a “specified debtor” receives a loan or becomes indebted to a foreign affiliate of the corporation and none of the exceptions in subsection 90(8) apply. A “specified debtor” is defined in subsection 90(15) to include the corporation itself. Thus, subject to the application of subsection 90(8), the Loan Payable satisfies the conditions of subsection 90(6).

Subsections 90(6) to (15) generally apply to loans received and indebtedness incurred after August 19, 2011. However, there is a transitional rule that provides that any loans made on or before August 19, 2011 are deemed to be separate loans made on August 20, 2014, to the extent of the amounts thereof that remain outstanding on August 19, 2014. Since the Loan Payable was incurred before August 19, 2011 and remained outstanding on August 19, 2014, it is deemed to be made on August 20, 2014.

Paragraph 90(8)(a) provides that subsection 90(6) does not apply to a loan or indebtedness that is repaid, other than as part of a series of loans or other transactions and repayments, within two years of the day the loan was made or the indebtedness arose.

In our view, the liquidation of Lender FA into Finance FA did not result in a repayment of the Loan Payable for the purpose of paragraph 90(8)(a). As we state in Technical Interpretation 2013-0499121E5, there is no provision in the Act that provides that a loan to a taxpayer is repaid as a result of the liquidation of the creditor affiliate into another foreign affiliate of the taxpayer.

Further, in our view, neither the entering into the A&A Agreement, nor the subsequent issuance of the Taxpayer’s Note resulted in a repayment of the Loan Payable for the purpose of paragraph 90(8)(a), unless it can be established as a matter of fact (taking into account the parties’ intention) and the relevant contract law that the Loan Payable was extinguished and substituted for a new loan. Where there are no changes to the terms of a loan other than the identity of the creditor, which is the case in the Described Case, an assignment of the loan to a new creditor would not generally cause an extinguishment of the loan and its substitution for a new one.

On XXXXXXXXXX, the Taxpayer’s Note and the Finance FA Note were offset and settled. As was confirmed at 2013 CTF Roundtable (2013-0508141C6), we consider an upstream loan or indebtedness to be repaid by the debtor for the purposes of paragraph 90(8)(a) and subsection 90(14) by way of set-off against a receivable of the debtor if the set-off represents a legal discharge of the loan or indebtedness. We understand that in the Described Case, there is no concern about the legal effect of the Set-Off of Notes Agreement, and the only interpretative issue is whether it resulted in the discharge and repayment in full of the Taxpayer’s loan or indebtedness for the purpose of paragraph 90(8)(a).

Although initially the Loan Payable was undocumented, its terms and conditions were subsequently documented in the instrument called the Taxpayer’s Note. Despite certain statements made in document 2013-0499121E5, both the Loan Payable and the Taxpayer’s Note refer to the same indebtedness of the Taxpayer. In document 2013-0499121E5, the requestor asked to provide comments on the availability of a relief where as a result of a liquidation of the creditor foreign affiliate into another foreign affiliate of Canco a new debtor-creditor relationship triggered the application of subsection 90(6) to an amount to which this subsection had already applied. Since the debt described in that document was not repaid within two years from the day the loan was made, paragraph 90(8)(a) was not applicable, and it was concluded that a relief from a potential double inclusion in the income of the borrower of the borrowed amount was available under subsection 248(28).

Paragraph 90(8)(a) does not require the repayment to be made to the original creditor. As such, it is our view, that in the Described Case, the repayment by the Taxpayer to Finance FA pursuant to the Set-Off of Notes Agreement satisfied the requirement in paragraph 90(8)(a) in respect of the Taxpayer’s indebtedness.

This conclusion is consistent with our prior position on repayment taken in the context of subsection 227(6.1). Subsection 227(6.1) provides for a refund of the Part XIII tax where “a person on whose behalf an amount was paid to the Receiver General under Part XIII because of subsection 15(2) and paragraph 214(3)(a) repays the loan or indebtedness or a portion of it...” In Technical Interpretation 2014-0560401E5 we state that subsection 227(6.1) does not require the person to repay the loan or indebtedness to the original creditor that made the loan or indebtedness. As such, it is our view that where a debt to which subsection 15(2) applies is assigned to a new creditor and the debtor subsequently repays the debt to that new creditor, the debtor may be entitled to a refund of the Part XIII tax previously assessed. In our view, the concept of repayment in paragraph 90(8)(a) should be interpreted consistently with this position taken in respect of subsection 227(6.1) and subsection 15(2).

The policy objective of the upstream loan rules is summarized in the October 24, 2012 technical notes as follows:

“These rules are anti-avoidance rules designed to prevent taxpayers from making synthetic dividend distributions from foreign affiliates in order to avoid what would otherwise be income inclusions under new subsection 90(1) that are not fully offset by certain deductions that would be available under subsection 113(1).”

In the Described Case, there was only one “synthetic dividend distribution” to the Taxpayer from its foreign affiliate group. The Loan Payable was legally repaid by the Taxpayer within the time limit provided in paragraph 90(8)(a) by means of a set-off against a dividend distribution from its foreign affiliate. Consequently, there is no income inclusion under subsection 90(6) in respect of the Loan Payable subsequent to the set-off of the Taxpayer’s Note because both terms refer to the same indebtedness.

In the Described Case, the Taxpayer implemented the Transactions in order to repay the Loan Payable in compliance with the upstream loan rules and the related coming-into-force provisions. The subsequent enactment of subsections 90(6.1) and (6.11) provides additional contextual support to the conclusion that liquidating Lender FA into Finance FA and repaying the upstream loan to the Finance FA was not abusive from the policy perspective. The enactment of subsections 90(6.1) and (6.11) removes the uncertainty about the effect of a repayment of a debt subject to subsection 90(6) to a new creditor where the debt became owing to the new creditor in the course of an amalgamation, a merger, a winding-up or a liquidation and dissolution of the original creditor. The October 27, 2017 technical notes state:

“New subsections 90(6.1) and (6.11) provide "continuity" rules for purposes of the upstream loan rules in subsections 90(6) and 90(7) to (15) (and certain related temporary relieving rules) where there has been a reorganization of a corporation or partnership. These new subsections are intended to ensure that the upstream loan rules continue to apply, and cannot be avoided, where a reorganization occurs following the making of an upstream loan. They are also intended to ensure that a reorganization does not result in double taxation, either by causing the upstream loan rules to apply multiple times in respect of what is in substance the same debt, or by preventing a repayment of a debt from being effective for purposes of the rules.”

If subsections 90(6.1) and (6.11) applied in the Described Case, after the assignment of the Loan Payable on the liquidation of Lender FA, Finance FA would be deemed to be same creditor as, and a continuation of, Lender FA; and the repayment of the Taxpayer’s Note would, for the purpose of applying paragraph 90(8)(a), clearly be viewed as a repayment of the Loan Payable. Subsections 90(6.1) and (6.11) apply in respect of transactions and events that occur on or after September 16, 2016, unless the taxpayer elected for these provisions to apply retroactively as of August 20, 2011. The Taxpayer did not file such an election in the Described Case.

Since there was a bona fide repayment in full of the Taxpayer’s indebtedness subsection 90(6) does not apply in respect of Lender FA and Finance FA according to paragraph 90(8)(a), and there is no need to address the additional questions posed in your submission.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

John Meek
Acting Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch