Finance narrows the scope of the back-to-back loan rules

The proposed back-to-back loan rule would impose withholding tax where a Canadian borrower (say, "Canco") pays loan interest to an arm’s length "intermediary" if there is an "intermediary debt" with specified attributes owing, in turn, by the intermediary to a person who does not deal at arm’s length with Canco. There are cognate changes to the thin cap rules. The scope of an intermediary debt has been narrowed in the 20 October 2014 version of the draft legislation from the 29 August 2014 version:

• A strong causal connection now is required (through use of a "because" linkage (see Hoefele, Williams), except in the obvious case of limited recourse intermediary debt) between the intermediary debt and the Canco debt
• Reference is made to the Canco debt having become owing to the intermediary "because" of a security interest or other "specified right" of the intermediary, which again is more stringent than the August 29 version
• Furthermore, the holder of security may now pledge the secured property to secure the repayment of other debts which are part of the same package – and default does not result in a specified right provided that the intermediary must use any sale proceeds from the secured property to repay the Canco debt (or the related debts)

However, a safe harbour, for situations where intermediary debts represent less than 25% of qualifying categories of loans owing by and related secured property of Canco, remains quite narrow.

Neal Armstrong. Summaries of Steve Suarez, "Canada Releases Revised Back-to-Back Loan Rules," Tax Notes International, October 27, 2014, p. 357 under s. 212(3.1)(c) and s. 18(6)(d).