19 November 1990 Ruling 901631 F - Loan Owed by Former Foreign Affiliate

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.

19(1)

November 19, 1990

Dear Sirs:

Re:  Loan owed by former foreign affiliate Subsection 15(2)

This is in response to your letter dated July 12, 1990 in which you inquired as to our interpretation of subsection 15(2) of the Income Tax Act (Canada) (the "Act") in the context of a loan originally made by a corporation resident in Canada to a foreign affiliate, in circumstances where the borrower subsequently ceases to be a foreign affiliate of the lender.

All statutory references in this letter are to the Act.

Perhaps our position is most easily explained by reference to the following hypothetical situation:

1.     Canco is a corporation resident in Canada.

2.     All the issued and outstanding shares of Canco are owned by a shareholder which is a non-resident of Canada (the "Shareholder").

3.     Amco is a corporation resident in the United States.

4.     Throughout a particular taxation year of Amco, Amco is a foreign affiliate, within the meaning assigned by paragraph 95(1)(d), of Canco.

5.     In the particular taxation year Amco receives a loan (the "Loan") from Canco.

6.     In a subsequent taxation year, while the Loan is still outstanding, Canco distributes all its shares of Amco to the Shareholder, such that Amco ceases to be a foreign affiliate of Canco.

While subsection 15(2) does not apply when the Loan is originally received, since Amco is not then connected with the Shareholder (by reason of paragraph 15(2.1)(a)), you have inquired as to whether subsection 15(2) will have application in the subsequent year when Amco becomes connected with the Shareholder.

For purposes of your inquiry, the relevant portion of subsection 15(2) reads as follows:

     Where a person ... is connected with a shareholder of a particular corporation ... and the person ... has in a taxation year received a loan from or has become indebted to the particular corporation ..., the amount of the loan or indebtedness shall be included in computing the income for the year of the person....

In our view, subsection 15(2) will apply only if, at the time when the loan is received or the indebtedness is incurred, the borrower or debtor is:

(a)     a shareholder of the particular corporation,

(b)     connected with a shareholder of the particular corporation, or

(c)     a member of a partnership or a beneficiary of a trust that is a shareholder of the particular corporation.

Thus, if at the time when the loan is received, the person receiving the loan is none of the above, no amount will be included in his income pursuant to subsection 15(2), even where there may subsequently be a change in his status.

Returning to the above hypothetical example, since Amco is not connected with the Shareholder when the Loan is received, subsection 15(2) is inapplicable, notwithstanding that in a subsequent taxation year Amco becomes connected with the Shareholder.

These comments should not be construed as precluding the application of any other provision of the Act, such as subsection 15(1), 56(2) or 245(2), that may be relevant, depending on all the circumstances.

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on the Department of National Revenue.

Yours truly,

for DirectorReorganization and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch