3 October 1990 Internal T.I. 74837 F - Assignment of Loan to Circumvent Application of Act and GAAR

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.

SUBJECT:  Section 17 - Assignment of Loan to Circumvent

This is in reply to your Memorandum dated March 26, 1990.

In our opinion, subject to Part XVI of the Act (the so-called General Anti-Avoidance Rules) effective in respect of transactions after September 13, 1988, subsection 17(1) will not apply after the indebtedness created by a loan made by a corporation resident in Canada (the "Lender") to a non-resident person (the "Borrower") has been assigned by the Lender to another person (the "Assignee").

It is well established by decisions of the Courts that the assignee of a debt is not a "lender" and cannot be said to have "loaned money [to the Borrower]": Her Majesty the Queen v. Pollock Sokoloff Holdings Corp. (1976), 30 DTC 6181 (F.C.A.), Aime Duquette v. M.N.R. (1984), 38 DTC 1820 (T.C.C.), M.N.R. v. T.E. McCool Limited (1949), 4 DTC 700 (S.C.C.).

On an assignment of a debt, the debt remains outstanding. Accordingly, as indicated by you in your Memorandum dated March 26, 1990, there is a technical argument that interest can be imputed to the Lender even after the assignment so long as the debt remains outstanding. However, this argument appears unreasonable and was refuted by the decision of the Tax Review Board in Ronald K. Banister v. M.N.R. (1973), 27 DTC 42. In Banister the Tax Review Board held that the lender/borrower relationship terminated as between the Lender and the Borrower on the assignment of the debt by the Lender and that consequently subsection 17(1) ceased to apply after the assignment.

The Memorandum to you from Calgary District Office dated March 22, 1990 that you forwarded to us in connection with this matter makes reference to "novation". An assignment is different from a novation. An assignment is essentially a transfer of the property rights in a debt by the creditor to a third party. The debt remains in existence, but there is a change in the owner thereof and the debtor/creditor relationship between the Lender and the Borrower is succeeded by a debtor/creditor relationship between the Assignee and the Borrower. A novation, on the other hand, involves the substitution of a new contract for a previously existing contract and thus involves a discharge of the original debt and the creation of a new debt. However, even if there is a novation, it does not necessarily follow that the result will be a new loan by the new creditor to the debtor. There will be a new contract, but a new loan will only occur if in fact there is a new advance of money by the creditor to the debtor. Thus in the case of a novation, there may be a new debt and a new creditor, but there will not necessarily be a loan or a lender.

21(1)(b)

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