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 loans to individuals by a non-financial institution are eligible for the investment allowance.
Position: No
Reasons: The law
January 8, 1998
HALIFAX T.S.O. HEADQUARTERS
Audit Services Michael Cooke
(613) 957-3498
Attention: Brian Monroe
973218
Definition of Investment Allowance - Subsection 181.2(4) of the Act
We are writing in response to your memorandum dated December 3, 1997 wherein you requested our views on the application of Part I.3 of the Act to the fact situation described in a letter that was sent to you by XXXXXXXXXX, dated November 27, 1997.
In the fact situation described by XXXXXXXXXX in his letter, a corporation (say "Company A") borrowed money from an arm's length financial institution and used the loan proceeds to make several loans to various individuals. These individuals are required to loan these funds to a second corporation (say "Company B") that is related to Company A and Company B, in turn, uses these funds to make an arm's length loan to a third corporation (say "Company C"). It is our understanding that none of these corporations are considered to be a "financial institution" as that term is defined in subsection 181(1) of the Act.
XXXXXXXXXX concludes that Company A would be subject to Part I.3 tax on the loan proceeds it received from the financial institution since Company A would not be entitled to an "investment allowance", as that term is defined under subsection 181.2(4) of the Act, for the loans it made to the various individuals. Further, while Company B would not be subject to Part I.3 tax on the loan proceeds it received from Company A (since Company B would be entitled to an investment allowance for the loan it made to Company C) Company C would also be subject to Part I.3 tax on the loan proceeds it received from Company B. In XXXXXXXXXX view, this represents a form of double taxation because if the "indirect loan" from Company A to Company B (via the Company A loans to the individuals) was made directly only Company C would have been subject to Part I.3 tax on the loan proceeds since both Company A and Company B would have been entitled to an investment allowance.
Our Views
Pursuant to paragraph 181.2(4)(b) of the Act where a corporation makes a loan or advance to another corporation the lending corporation will only be entitled to claim an investment allowance based on the carrying value of that loan or advance where the borrowing corporation is not otherwise exempt from Part I.3 tax (otherwise than because of paragraph 181.1(3)(d)). Based on our understanding of the limited facts described in XXXXXXXXXX letter, we agree that Company A would not be entitled to an investment allowance for any loan or advance to any individual since there is currently no provision in the legislation that would permit such a deduction from its taxable capital.
It is not clear to us from the limited facts contained in XXXXXXXXXX letter why the series of loans was structured in the manner described above, and what other income tax implications, if any, arose from such a structure. However, the Supreme Court in Hickman Motors Limited v. The Queen 97 DTC 5363 (at page 5364) recently reaffirmed the principle that "It is a fundamental principle of tax law that (e)very man is entitled if he can to order his affairs so as the tax attaching under the appropriate Acts is less than it would otherwise be". Given the Supreme Court's affirmation of this principle of tax law, it is our view that a taxpayer would not be permitted to challenge the legal structure of their own transactions in order to obtain a more favorable tax result.
We hope our comments are of assistance to you. Should you wish to discuss this further do not hesitate to call us.
F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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