CRA interprets s. 90(6) so as to avoid a double income inclusion for an upstream loan (or a phantom inclusion where a loan has been timely repaid)

In a technical interpretation published today but previously discussed by Barnicke and Huynh, a grandchild foreign subsidiary (FA 2) of Canco, which made a loan to Canco, is wound-up into the immediate subsidiary (FA 1). This results in a second income inclusion to Canco under the upstream loan rule (s. 90(6)) – yet Canco will be entitled under s. 90(9) to only one deduction for the exempt surplus of FA 2 which moved up to FA 1 on the liquidation. However, CRA will apply s. 248(28)(a) to avoid such double inclusion.

If under the same structure, FA1 merges with FA2 to form a new entity, so that Canco is considered to have incurred a loan to a new entity (Amalco), CRA will accept that the timely repayment by Canco of the "new" loan should also be treated as repayment of the old loan which was incurred to the predecessor (FA2), so that there is no income inclusion under s. 90(6) with respect to either loan.

Neal Armstrong. Summary of 14 November 2013 T.I. 2013-0499121E5 under s. 90(6).