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.
XXXXXXXXXX 933519
Attention: XXXXXXXXXX
May 2, 1994
Dear Sirs:
Re: Loan from Non-resident Lender
This is in reply to your letter dated November 25, 1993.
Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").
You request our view concerning the application of subsection 18(4) and paragraphs 20(1)(c) and 212(1)(b) of the Act to the following hypothetical fact situation.
1)A co. is a corporation resident in Canada.
2)B co. is a non-resident financial institution which deals at arm's length with A co.
3)Neither B co. nor any person who does not deal at arm's length with B co. owns any shares of A co., nor does any such person have any right whatsoever to acquire shares of A co. or to cause A co. to redeem, acquire or cancel any of its shares.
4)B co. makes a loan to A co. (the "Loan"). The principal amount of the Loan is to be repaid in one lump sum, five years from the date the loan funds are advanced to A co. Interest on the Loan is payable every six months.
5)No person has made a loan to B co. on condition that B co. make the Loan to A co.
6)The Loan proceeds are used by A co. for the purpose of earning income from a business.
It is our view that the interest on the Loan would be deductible in computing the income of A co. pursuant to paragraph 20(1)(c) of the Act and that subsection 18(4) of the Act would not limit the extent to which such interest could be deducted.
In addition, it is our view that the interest on the Loan would be exempted from Part XIII tax pursuant to subparagraph 212(1)(b)(vii) of the Act provided that A co. is not required to repay more than 25% of the principal amount of the Loan within five years of the date the Loan was made under any circumstance other than one set out in clauses 212(1)(b)(vii)(C)-(F) of the Act.
For more information concerning the application of subsection 18(4) and paragraph 212(1)(b) of the Act please refer to IT-59R3 entitled "Interest on Debts Owing to Specified Non-Residents (Thin Capitalization)" and IT-361R2 entitled "Exemption from Tax on Interest Payments to Non-Residents".
We trust the above is the information you require.
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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