CRA finds that the wind-up of FA2, owed an upstream loan by the taxpayer, into FA1 held by the taxpayer did not constitute a repayment of the loan for s. 90(8)(a) purposes

CRA found that where a foreign affiliate (FA2), which was owed an undocumented loan by a Canadian corporate taxpayer, was wound up into a US LLC (FA1) held directly by the taxpayer, this did not result in the repayment of such loan for purposes of the rule in s. 90(8)(a), which effectively required that the loan be repaid within two years - even though the taxpayer issued a note evidencing the loan now owing by it to FA1. CRA stated:

Where there are no changes to the terms of a loan other than the identity of the creditor … an assignment of the loan to a new creditor would not generally cause an extinguishment of the loan or substitution for a new one.

However, CRA accepted that the loan was repaid as a result of FA1 paying a dividend to the taxpayer through the issuance of a promissory note, with that note then being set off against the loan owing by the taxpayer to FA1. In particular, s. 90(8)(a) did not require the repayment to be made to the original creditor.

Although in fact this repayment by set-off occurred many years after the initial loan, a transitional rule deemed that loan to have been issued on August 19, 2014, which was less than two years before the set-off transaction.

Neal Armstrong. Summary of 24 July 2023 Internal T.I. 2020-0841891I7 under s. 90(8)(a).