28 August 2025 External T.I. 2022-0929921E5 - Application of subsection 212.3(1)

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 conditions in paragraphs 212.3(1)(a) and (b) are met in the case of an investment made by a Canadian resident corporation in a foreign corporation if the Canadian resident corporation was controlled by an individual resident in Canada at the investment time but that person later emigrated to a foreign jurisdiction as part of the same series of transactions or events.

Position: Yes, the conditions of paragraphs 212.3(1)(a) and (b) are met since the investment and emigration are presented in the facts provided as being part of the same series of transactions or events.

Reasons: Based on the wording of the provision.

XXXXXXXXXX								2022-092992
									Catherine Zhang

August 28, 2025

Dear XXXXXXXXXX:

Re: Application of subsection 212.3(1)

This is in response to your email query in which you requested our view of the application of subsection 212.3(1) of the Income Tax Act (the “Act”) in the context of the facts described below.

Facts

• Mr. A, an individual who resides in Canada, owns all of the issued and outstanding shares of a Canadian resident corporation (“Canco”).
• Canco owns all of the issued and outstanding shares of a US corporation (“USco”).
• On June 1, 2021, Canco made a $1M loan to USco.
• On July 1, 2021, Mr. A ceased to reside in Canada and became a resident of a country which has no tax treaty with Canada.
• The emigration was a part of a series of transactions or events that included the $1M loan/investment.
• There were no separate paragraph 251(5)(b) rights or similar arrangements with non-resident persons.

Question: Does subsection 212.3(1) apply to an investment made by a Canadian resident corporation in a foreign corporation (the $1M loan) if the Canadian resident corporation was controlled by an individual resident in Canada at the investment time but that person later emigrated to a foreign jurisdiction as part of the same series of transactions or events?

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The preamble in paragraph 212.3(1) provides that subsection 212.3(2) applies to an investment in a non-resident corporation (the “subject corporation”) made at any time (the “investment time”) by a corporation resident in Canada (the “CRIC”) if certain conditions are met. Paragraphs 212.3(1)(a) and (b) of the Act contain most of these conditions.

Paragraph 212.3(1)(a) generally requires a subject corporation to be a foreign affiliate of the CRIC or of a corporation that does not deal at arm’s length with the CRIC (the “other Canadian corporation”). That condition has to be met immediately after the investment time or as part of a transaction or event or series of transactions or events that includes the making of the investment.

For subsection 212.3(2) to apply, one of the conditions in subparagraphs 212.3(1)(b)(i), (ii) or (iii) also needs to be met. The preamble in paragraph 212.3(1)(b) generally requires that the CRIC or the other Canadian corporation be controlled by a non-resident person or a group of non-resident persons not dealing with each other at arm’s length (for the purpose of section 212.3, that one non-resident person, or each member of the group of non-resident persons, as the case may be, is referred to as a “parent”, and the group of non-resident persons, if any, is referred to as the “group of parents”).

In general, the condition in subparagraph 212.3(1)(b)(i) is met if, at the investment time, the parent owns shares of the CRIC or the other Canadian corporation that represent 25% or more of the votes or fair market value of all of the issued and outstanding shares of the CRIC or the other Canadian corporation. That condition is met if the test is met by the non-resident parent alone or together with persons that are not dealing at arm’s length with the parent.

The test in subparagraph 212.3(1)(b)(i) is not limited to requiring the “parent” to be a non-resident person at the investment time for the purpose of assessing the 25% equity threshold. The preamble in paragraph 212.3(1)(b) extends it to a situation in which a CRIC, although not controlled by a non-resident person at the investment time, becomes controlled by a non-resident person after the investment time as part of a series of transactions or events that includes the investment.

In the situation at hand, the $1M loan from Canco to USco is an investment described in paragraph 212.3(10)(c) and is thus an investment for the purposes of the preamble in subsection 212.3(1).

Paragraph 212.3(1)(a) is satisfied since Canco owns all of the issued and outstanding shares of USco immediately after the investment time. Given that Canco becomes controlled by a non-resident person as part of the series of transactions or events that includes the making of the investment by Canco in USco (Mr. A, would therefore be referred to as the “parent” for purposes of the section), the test in paragraph 212.3(1)(b) will be met if one of the conditions in subparagraphs 212.3(1)(b)(i) to (iii) is satisfied.

The test outlined in subparagraph 212.3(1)(b)(i) is satisfied because at the investment time, Mr. A owns all of the issued and outstanding shares of Canco, which is 25% or more of the outstanding shares of Canco. Although Mr. A was a Canadian resident at the investment time, he became a non-resident person as part of the series of transactions or events that includes the investment.

There are several exceptions to the application of subsections 212.3(1) and 212.3(2) of the Act which are assumed to not to apply in this case. For example, for purposes of this letter, it is assumed that the exception in subsection 212.3(16) does not apply. It is also assumed that no election under subsection 212.3(11) is made to have the $1M loan treated as a pertinent loan or indebtedness.

Therefore, based on the facts provided, the conditions of paragraphs 212.3(1)(a) and (b) are met and subsection 212.3(2) therefore applies to the $1M loan from Canco to USco.

We trust that our comments will be of assistance to you.

Yours truly,

Yves Grondin
Section Chief
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch