22 December 1999 External T.I. 9931735 - APPLICATION OF SECTION 17

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 993173
B. Bloom
Attention: XXXXXXXXXX

December 22, 1999

Dear Sir:

Re: Section 17 of the Income Tax Act (Canada) (the "Act")

We are writing in response to your facsimile of December 3, 1999, wherein you request our views as to the application of section 17 of the Act to the following hypothetical transactions:

1. Canco is a taxable Canadian corporation. All of the stock of Canco is owned by a corporation which is a non-resident of Canada ("Foreign Parent").

2. Canco carries on an active business in Canada. Canco owns 100% of the stock of a foreign affiliate ("FA").

3. FA carries on an active business in the country in which it is resident.

4. Foreign Parent makes an interest bearing loan to FA. It is assumed that the terms of the loan would bear market terms and conditions.

5. FA uses the money borrowed from Foreign Parent to make a dividend distribution to Canco.

6. Canco uses the proceeds received from FA to either fund a return of capital, or to pay a dividend, to Foreign Parent.

You state that there is a view that subsection 17(2) could apply in these circumstances to deem FA to owe to Canco an amount equal to the amount owing by FA to Foreign Parent under the loan. If subsection 17(2) is applicable, then subsection 17(1) would operate to impute interest income to Canco on the amount deemed owing, unless one of the exceptions in section 17, in particular the exception in clause 17(8)(a)(i)(A), applied. In general terms, clause 17(8)(a)(i)(A) provides that subsection 17(1) does not apply to an amount owing to a resident corporation, if the amount is owed by a controlled foreign affiliate of the corporation and the amount owing arose as a loan or advance of money to the affiliate that was used by it for the purpose of earning income from an active business (as that term is defined in subsection 95(1)) of the affiliate.

Based on the limited information you have provided us, it is our view that subsection 17(2) is applicable in this case. It is also our view that clause 17(8)(a)(i)(A) would not except the amount deemed owing by CFA to Canco under subsection 17(2) from the application of subsection 17(1). This is because FA did not use the loaned funds for the purpose of earning income from its active business, as required by clause 17(8)(a)(i)(A), but, rather, used the funds to pay a dividend to Canco.

We recognize, however, that the application of the anti-avoidance rule in subsection 17(2) to the situation you describe may be unintended, and will bring this matter to the attention of the Department of Finance for their consideration.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and, therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

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