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: Administrative position subsection 18(6)
Position: Please review document
Reasons: Interpretation of IT Bulletin position
970133
XXXXXXXXXX O. Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX
March 27, 1998
Dear Sirs:
Re: Subsections 18(4) and 18(6) of the Income Tax Act
This is further to our letter to you dated October 2, 1996 concerning the above subject matter. The following hypothetical arrangement was described in our earlier technical interpretation.
A) A non-resident corporation ("Parent") owns all the shares of two corporations resident in Canada ("Opco 1" and "Opco 2").
B) The equity of Parent computed under subparagraph 18(4)(a)(ii) vis-à-vis Opco 1 is $500 while the equity of Parent computed vis-à-vis Opco 2 thereunder is only $100.
C) Parent has made a loan of $1,000 (the "first loan") to Opco 1 on condition that Opco 1 make a loan of $1,000 (the "second loan") to Opco 2. Opco 1 has no other outstanding debts to specified non-residents as defined in subsection 18(5).
We provided the following opinion. Since Parent has sufficient equity as computed under subparagraph 18(4)(a)(ii) vis-à-vis Opco 1, subsection 18(4) would not apply to deny any portion of the interest paid to Parent by Opco 1 on the first loan. In addition, the Department would not apply the provisions of subsections 18(4) and (6) to the interest paid on the second loan by Opco 2 provided that the interest rate charged on the first loan is equal to the interest rate charged on the second loan. We indicated that the following was the Department's administrative position with respect to the application of subsection 18(6).
While 18(4) of the Act may nevertheless apply to deny all or a portion of the interest paid on the "first loan" referred to in that provision, subsection 18(6) of the Act will not be applied to the "second loan" in circumstances where such loan is made by a corporation resident in Canada ("Canco 1") to a second corporation resident in Canada ("Canco 2") provided that:
1) the person who made the "first loan" referred to in that provision is a specified non-resident shareholder of Canco 1 and qualifies as a specified shareholder of Canco 1 otherwise than by virtue of a right referred to in paragraphs (c) or (d) of the definition of specified shareholder in subsection 18(5),
2) the first loan and the second loan bear the same rate of interest and
3) Canco 1 is related to Canco 2.
The Department has subsequently withdrawn the above position. Moreover, the Department has concluded that if condition 2) above were satisfied, the result would generally be that a deduction in respect of the interest paid on the first loan could be denied under paragraph 20(1)(c) of the Act on the basis that the borrowed money was not used by Canco 1 to earn income. That is, the interest revenue of Canco 1 on the second loan less the interest expense attributable to the first loan yields no income for Canco 1 and based on the facts there is no other manner whereby Canco 1 is able to benefit by making the second loan.
The Department will nevertheless stand by paragraph 3 of IT-59R3. In our view, paragraph 3 of IT-59R3 contemplates a case where a non-resident person ("NRP") which has de jure control over a corporation resident in Canada ("C1"), makes a loan ("Loan 1") to C1 and C1 makes a loan ("Loan 2") in the same amount to another corporation resident in Canada ("C2") over which NRP has de jure control. In such cases the Department would not seek to apply the provisions of subsections 18(4) and 18(6) to interest paid on Loan 2. Therefore, paragraph 3 of IT-59R3 would extend to the hypothetical arrangement described in paragraphs A) to C) above and the Department would not seek to apply subsections 18(4) and 18(6) to the interest paid by Opco 2 to Opco 1 on the second loan. However, the interest earned on the second loan would generally have to exceed the interest paid on the first loan in order for the interest paid on the first loan to be deductible by Opco 1 pursuant to paragraph 20(1)(c) of the Act.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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