3 September 1999 External T.I. 9824065 - SUBSECTION 17(1)

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 subsection 17(1) (prior to 1999 amendments) applies to a loan owed by a non-resident person where at the time the loan was made the borrower was a resident of Canada

Position: Yes

Reasons: The Department's position is that subsection 17(1) contemplates an annual and continuous test for the purposes of calculating the interest deemed to be received by the lender. Also, the new subsection 17(1) (i.e., after the amendments in 1999) clearly applies to such a situation.

xxxxxxxxxx		982406
S. Leung
Attention:  xxxxxxxxxx
September 3, 1999
Dear Sirs:

Re Subsection 17(1) of the Income Tax Act (the "Act")

We are writing in response to your letter in which you requested our opinion as to whether the provisions of subsection 17(1) of the Act prior to the June 1999 amendments ("Former Subsection 17(1)") apply to a loan owed by a non-resident person of Canada to a Canadian resident corporation where at the time the loan was made the borrower was a resident of Canada.

It is your view that Former Subsection 17(1) of the Act would not apply because when the loan was made the borrower was not a nonresident person of Canada. In other words, you maintained that the recipient of the loan must be a non-resident person of Canada at the time the act of lending occurs. You based your opinion on your interpretation of the phrase "has lent money to a nonresident person" used in Former Subsection 17(1) of the Act and the case of E.H. Price Limited V. M.N.R. (91 DTC 135 (TCC)).

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable District Taxation Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

With regards to the provisions of Former Subsection 17(1), the Department has taken the position that these provisions contemplate an annual and continuous test for the purposes of calculating the interest deemed to be received by the lender corporation. Therefore, where a resident of Canada who had received a loan from a corporation resident in Canada has subsequently become a non-resident person, the provisions of Former Subsection 17(1) of the Act could apply if all the other conditions of the provisions are met. In this regard, the Department does not feel that the case of E.H. Price Limited is relevant to the situation described above as the case mainly dealt with whether other forms of indebtedness could be considered as a loan, not the residency status of the borrower.

It should be noted that the amendments to section 17 of the Act were enacted on June 17, 1999 by c. 22, section 8, applicable to taxation years that begin after February 23, 1998 except that subsections 17(2) and (3) of the Act, as amended, do not apply to taxation years that begin before 2000. The new provisions of subsection 17(1) of the Act, as enacted on June 17, 1999, clearly apply to the situation described in your letter.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch