Canco "sells" its “eligible” trade accounts receivable to its U.S. wholly-owned subsidiary (USco) for their outstanding value, less an arm’s length factoring fee. USco has no recourse, directly or indirectly, against Canco in respect of the receivables, except that "adjustments" to the face amount of the receivables occur if they subsequently are determined not to be "Eligible receivables" as defined in the transfer agreement. Would Revenue Canada consider that the receivables have been sold (so that the discount earned by USco on the receivables would not be interest subject to withholding), or would there be considered to be a loan by USco to Canco secured by a partial assignment of the accounts receivable, with the discount being considered to be interest payable under such loan?
Revenue Canada responded:
A number of facts may compel the conclusion that the arrangements between the parties is a "loan" as opposed to a "sale", for example, where the amount of the discount is not at the normal rate or terms for discounting of similar types of accounts receivable in similar types of businesses, or for similar types of risks, it may be seen as a loan (or even as a service) of the subsidiary for the benefit of the parent corporation. … Similarity the fact that the Canadian company continues to collect the accounts receivable without notifying the various debtors would tend to indicate that a transfer of title has not actually taken place. Another factor which would tend to point to a transaction being a "loan" as opposed to a "sale" would be the amount of the "fees" earned by the Canadian Company for its services of the collecting the accounts receivable.
The deductibility of the discount to the Canadian Taxpayer, would be subject to the considerations listed in IT Bulletin 188R and must meet the provisions of section 67 and section 69 of the Act.
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