25 July 1994 External T.I. 9406015 - DEBTS TO SPECIFIED NON RESIDENTS

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.

Principal Issues: - Whether accrued interest would be outstanding debt to non-resident?

Position TAKEN: - interest not paid on due date becomes a debt or other obligation to pay an amount

Reasons FOR POSITION TAKEN: our response to Question 3 at 1993 Canadian Mgmt Tax Conference

	    		940601
XXXXXXXXXX	    M.P. Sarazin

Attention: XXXXXXXXXX

July 25, 1994

Dear Sirs:

Re: Outstanding Debts to Specified Non-Residents

This is in reply to your facsimile dated March 8, 1994 wherein you requested our comments as to whether or not accrued interest would be considered "outstanding debts to specified non-residents" within the meaning assigned by paragraph 18(5)(a) of the Income Tax Act in the following hypothetical situation.

Unless otherwise stated all references to a statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Assume that a taxable Canadian corporation has an outstanding loan owing to its foreign parent. The terms of the loan are as follows:

(i)a commercial rate of interest is charged on the loan principal;

(ii)the accrued interest is to be paid on the anniversary date of the loan and, in the event that the accrued interest is not paid on the anniversary date ("Unpaid Interest"), no interest is to be charged on such Unpaid Interest; and

(iii)the loan principal, Unpaid Interest and accrued interest is payable on demand.

You are of the view that the accrued interest would not be considered "outstanding debts to specified non-residents" for the following reasons:

(a)the accrued interest would not be payable until the anniversary date therefore it would not satisfy clause 18(5)(a)(i)(A) of the Act which refers to a debt or other obligation that was "payable" by the corporation; and

(b)the accrued interest does not bear interest and, as such, it would not satisfy clause 18(5)(a)(i)(B) of the Act which refers to a debt on which interest paid or payable by the corporation is, or would be, but for subsection 18(4) of the Act deductible in computing the corporation's income for the year.

You would also like to know whether or not our position would be different if, under the terms of the loan, the accrued interest would only be payable on demand rather than on the anniversary date of the loan.

Comments

With respect to your position in (a) above, the Department stated in its response to Question 3 at the 1993 Corporate Management Tax Conference Round Table that "any accrued interest that is not paid on the due date becomes a "debt or other obligation to pay an amount" for purposes of the definition of "outstanding debts to specified non-residents" in subsection 18(5) of the Act at that time."

Notwithstanding that the accrued interest may constitute a "debt or other obligation to pay an amount" for purposes of the definition of "outstanding debts to specified non-residents" in subsection 18(5) of the Act, provided that no interest is charged on the accrued interest, such accrued interest would not be included in the taxpayer's "outstanding debts to specified non-residents" because the condition found in clause 18(5)(a)(i)(B) of the Act is not satisfied.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch