In the course of a submission that it was contrary to the scheme of the Act to apply s. 95(6)(b) to attack indirect loans to a non-resident parent, he stated:
Purpose of CFA definition (p. 1290)
- Earlier changes to section 17 (introduced under the 1998 federal budget) also directly targeted the establishment of a Finco to make an "indirect loan" to a borrower Opco that was held by a non-resident ultimate parent corporation, but only where the borrower Opco was not a "controlled foreign Affiliate" under a special definition of that term that required Canadian control, though again not necessarily by the Finco owning taxpayer, and again subject to a transitional period. It cannot be that paragraph 95(6)(b) applies to defeat a structure that is deliberately facilitated by subsections 17(3)(and (8).
In the course of a submission that it was contrary to the scheme of the Act to apply s. 95(6)(b) to attack indirect loans to a non-resident parent, he stated:
Purposes of s. 95(2)(n) (pp.1289-1290)
During the taxation years in question, there was no requirement that the relevant taxpayer (i.e., the Finco owning taxpayer) must have held a "qualifying interest" (as defined in paragraph 95(2)(m))), or any economic interest at all, in the borrower Opco. It was sufficient for the borrower Opco to be a related non-resident corporation, at least insofar as subdivision i is concerned. There is still no such requirement. When the rules were changed as announced under the 2007 federal budget to eliminate clause 95(2)(a)(ii)(A), which provided for recharacterization in respect of a borrower Opco that is merely a related non-resident corporation, paragraph 95(2)(n) was introduced for the purpose of deeming the Finco owning taxpayer to have the requisite qualifying interest provided that such an interest was held by a related corporation resident in Canada. These changes were intended to block the establishment of a Finco to make an "indirect loan" to a borrower Opco that was held by a non-resident ultimate parent corporation but only where not even 10% of its votes and value were held by the taxpayer or a related corporation resident in Canada, and a transitional period was provided for in the sense that these changes only had application for taxation years that end after 1999. It cannot be that these changes were unnecessary, or that the transitional rule was ineffective, because the structure was already defeated by paragraph 95(6)(b).
Essentially an indirect loan (p.1284)
[I]n essence, the decision involves the potential application of paragraph 95(6)(b) to a taxpayer's acquisition of the shares of a non-resident corporation as part of what is commonly referred to as an "indirect loan" financing arrangement….
No comparison with alternative transactions (pp. 1287)
In brief, it is submitted that the "purpose tests" under paragraph 95(6)(b) and subsection 245(3) involve the "why" (i.e., why was the actual transaction done?), not the "how" (i.e., why was the actual transaction done that way or instead of doing it another way or doing an alternative transaction?). This would mean that, as Bonner J. put it in Canadian Pacific, the word "primarily" is intended to preserve the right of the taxpayer to structure a business driven transaction in a tax-effective manner, not to test whether it was structured in a tax-efficient manner primarily in order to obtain a tax benefit – which of course would generally be the case.
Use of indirect loans by Canadian and foreign multinationals (p.1290)
There is no doubt that the Canada Revenue Agency ("CRA") and the Department of Finance have struggled for many years to find the right balance between facilitating the establishment of a Finco for the purpose of making an "indirect loan" in relation to Canadian multinationals, while curtailing this in relation to foreign multinationals, but that struggle has not played out through efforts to revise the purpose or effect of paragraph 95(6)(b). Paragraph 95(6)(b) does not provided for any distinction – and none should be read in – between a Finco owning taxpayer that is part of a Canadian multinational group rather than a foreign multinational group. Interestingly, even in the context of a Finco owning taxpayer that is part of a foreign multinational group, the structure is facilitated under subsection 212.3(24) of the foreign affiliate dumping provisions, provided that certain conditions are satisfied.
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