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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
932405
XXXXXXXXXX K. H. Major
Attention: XXXXXXXXXX
February 18, 1994
Dear Sirs:
Re: Non-resident-Owned Investment Corporation ("NRO")
This is in reply to your letter of August 19, 1993 wherein you requested our opinion in the following hypothetical situation.
X Ltd. ("X") is a NRO as defined in paragraph 133(8)(d) of the Canadian Income Tax Act (the "Act"). Y Ltd. ("Y") is a taxable Canadian corporation. Both X and Y are controlled by Z Inc. ("Z"), a foreign corporation. The only asset which X owns is a loan receivable from Y which X purchased from an unrelated lender.
You are concerned with the situation where X and Y have jointly elected, pursuant to subsection 78(1) of the Act, with respect to an amount of accrued but unpaid interest. That is, Y is deemed to have paid and X is deemed to have received the amount. X is also deemed to have made a loan to Y in an amount equal to the amount of accrued but unpaid interest. You were also concerned, with a situation where subsequently the terms of the loan agreement between X and Y have been changed in a such a manner that the existing debt obligation is considered to have been disposed of in accordance with the Interpretation Bulletin IT-448 ("IT-448").
Even though it is not entirely free from doubt we have assumed that the existing debt obligation is not a loan.
It is our view that the making of an election under subsection 78(1) of the Act will result in the making of a loan by X to Y for the purposes of paragraph 133(8)(d) of the ACT. ( Nothing in this response should be construed as an expression in any way of an opinion on the deductibility of the interest expense in a case where there are no actual payments of interest by Y.)
Where the terms of the existing debt obligation are changed in such a manner that X will have been considered to have disposed of that debt obligation, it is our opinion that in such a case X has made a loan to Y for the purposes of paragraph 133(8)(d) of the Act.
In each case it remains a question of fact whether the making of such loans would be X's principal business. As we were presented with insufficient facts, we are not in a position to express an opinion on this issue.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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