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.
Dear Sirs:
This is in reply to your letter of April 2, 1985 wherein you request our comments with regards to the application of subsection 18(4) of the Income Tax Act (the "Act") in the following hypothetical circumstances:
XXX
A Ltd., B Ltd. and D Ltd. are Canadian corporations. C Inc. is a U.S. corporation resident in the U.S. and not resident in Canada. B Ltd. and D Ltd. are wholly owned by A Ltd.; C Inc. is wholly owned by B Ltd. C Inc. has excess cash and lends this to D ltd. on a demand interest bearing basis.
Your views: Pursuant to subclause 18(5)(a)(i)(A)(II) of the Act the debt would constitute an "outstanding debt to a specified non-resident" and therefore the interest expense to D Ltd. could be restricted in its deductibility depending on the equity of D Ltd. It is your view that this is not an equitable result since the only reason the debt constitutes an outstanding debt to specified non-resident is due to the relationship between C Inc. and A Ltd. However, regardless of the contributed surplus and/or the paid-up capital of the shares of D Ltd. subsection 18(4) of the Act will apply to restrict the interest deductibility to D Ltd. unless it has significant retained earnings.
Our comments:
We agree with you that in the situation described, since there are no specified non-resident shareholders, regardless of the amounts of contributed surplus and paid up capital attributable to A Ltd. no amounts of contributed surplus or paid up capital will be considered in computing the amount described in subparagraph 18(4)(a)(ii) of the Act. As a result, unless D Ltd. has significant retained earnings, a portion of the interest expense on the debt could be disallowed under subsection 18(4) of the Act.
If you are of the view that this does not produce an equitable result, your concerns should be conveyed to the Department of Finance since it is the responsibility of the Minister of Finance to recommend changes in the Income Tax Act to Parliament.
We hope our comments will be helpful.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1985
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1985
Email this Content