6 December 2010 Internal T.I. 2010-0381061I7 - Non-resident Shareholder's Loans

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.

Principal Issues: How does a non-resident compute their subsection 227(6.1) Part XIII tax refund where a loan is made in a foreign currency and there has been a fluctuation in the value of the currency vis-à-vis the Canadian dollar between the time the loan was made and the time the loan is repaid.

Position: Refund cannot exceed the amount computed under paragraph 227(6.1)(b) of the Act.

Reasons: See Memo

							December 6, 2010

Wayne Funk
Large File Case Manager				HEADQUARTERS
Calgary Tax Services Office			A. Seidel, CMA
Harry Hays Building				(613) 957-2058
130 - 220 4th Avenue S.E.
Calgary AB  T2G 0L1
							2010-038106

Repayment of Shareholder Loan by Non-Resident

We are writing in response to your September 20, 2010 e-mail in which you requested our assistance in determining the appropriate amount of Part XIII tax to be refunded pursuant to subsection 227(6.1) of the Income Tax Act (the "Act") in the situation described below.

Background

1. A taxable Canadian corporation ("Canco") entered into a revolving credit agreement with its sole shareholder, a corporation that is a non-resident within the meaning thereof in subsection 248(1) of the Act ("Foreignco").

2. By the end of XXXXXXXXXX of 2004 Canco had advanced US$XXXXXXXXXX (net of repayments) to Foreignco. The Canadian dollar equivalent of these advances was $XXXXXXXXXX . This amount remained outstanding until XXXXXXXXXX of 2005. In XXXXXXXXXX of 2005, Foreignco repaid Canco US$XXXXXXXXXX . The Canadian dollar equivalent of the repayment was $XXXXXXXXXX .

3. Canco claimed a foreign exchange loss on the repayment of the loan of $XXXXXXXXXX . This loss was computed by applying the exchange rate on the day of repayment to come up with a Canadian dollar amount and comparing this amount with the Canadian dollar equivalent of the loan as determined using the exchange rate on the day the loan was made.

4. Pursuant to subsection 15(2) and paragraph 214(3)(a) of the Act, Canco is deemed to have paid, and Foreignco is deemed to have received, a dividend in XXXXXXXXXX of 2004 equal to Cdn $XXXXXXXXXX . Pursuant to subsection 212(2) of the Act, Canco was required to withhold and remit Part XIII tax on this deemed dividend. However, Canco failed to withhold or remit the relevant Part XIII tax. Subsequently, Canco made a voluntary disclosure on XXXXXXXXXX , 2007.

5. The voluntary disclosure contains the following representations:

(a) Canco's 2004 loan to its shareholder, Foreignco, was subject to the application of subsection 15(2) of the Act;

(b) by virtue of subsection 212(2) and paragraph 214(3)(a) of the Act, the deemed dividend resulted in a Part XIII tax liability to Foreignco;

(c) Canco failed to withhold and remit Part XIII tax on behalf of Foreignco;

(d) Foreignco repaid the loan in XXXXXXXXXX of 2005; and

(e) Foreignco was claiming a full "refund" of the Part XIII tax that was payable is respect of the deemed dividend pursuant to subsection 227(6.1) of the Act.

Issue

Subsection 227(6.1) of the Act applies where, among other things, in respect of a loan to a corporation, a person on whose behalf an amount was paid to the Receiver General under Part XIII because of subsection 15(2) and paragraph 214(3)(a) repays the loan or a portion of it. Where such a repayment occurs, the Minister is required, on written application made no later than 2 years after the end of the calendar year in which the repayment is made, to pay to the person an amount equal to the lesser of:

(a) the amount so paid (by Canco) to the Receiver General in respect of the loan or indebtedness or portion of it, as the case may be; and

(b) the amount that would be payable to the Receiver General under Part XIII if a dividend described in paragraph 212(2)(a) equal in amount to the amount of the loan repaid were paid by the corporation (Canco) to the person at the time of the repayment.

On the facts described above, subsection 227(6.1) of the Act provides Foreignco with a right to a refund of Part XIII tax equal to the lesser of the amounts described in paragraphs 227(6.1)(a) and (b). If the loan had been made in Canadian dollars, the full repayment of the loan would result in a full refund of the Part XIII tax. However, the loan was made in US dollars and was repaid at a time where the US dollar had depreciated in respect of the Canadian dollar between the time the loan was made and the time of repayment. More specifically, the amount of the loan and therefore the amount of the deemed dividend is Cdn$XXXXXXXXXX while the amount repaid, in Canadian dollars, was $XXXXXXXXXX . The issue is whether Foreignco is, in these circumstances, entitled to a refund of the amount of Part XIII tax paid by Canco on the $XXXXXXXXXX or to a refund equal to that portion of Part XIII tax that would be payable on Cdn$XXXXXXXXXX (the amount in Cdn$ that was repaid to Canco).

TSO's View

In your view, the amount that would be payable to the Receiver General under Part XIII, if a dividend described in paragraph 212(2)(a) of the Act equal in amount to the amount of the loan or indebtedness repaid were paid by Canco to Foreignco at the time of the repayment, would be determined using the amount received by Canco, being the Cdn$XXXXXXXXXX .

Taxpayer's Views

Foreignco has repaid the entire loan such that it should be entitled to a refund of the entire Part XIII tax that would have been paid to the Receiver General on its behalf by Canco.

Our Comments

In computing the amount of Part XIII tax payable by Foreignco on the loan referred to in paragraph 227(6.1)(a), the loan is converted to Canadian dollars at the time the loan was made to Foreignco. Less clear is the application of paragraph 227(6.1)(b) to the repayment of the loan in XXXXXXXXXX of 2005. On the one hand, one could argue that, since the entire loan has been repaid by Foreignco, the repayment of the loan should be converted at the exchange rate on the date of the loan because this would ensure that Foreignco is entitled to a full refund of the Part XIII tax that should have been remitted by Canco. This argument would ignore currency fluctuations between the time the loan was made and the time the loan was repaid. Alternatively, one could argue that the day on which the "particular amount arose" is the date of the repayment and that the exchange rate on that day in XXXXXXXXXX of 2005 is to be used to convert the U.S. dollar repayment to Canadian dollars.

Paragraph 227(6.1)(b) provides that the amount of Part XIII tax that Foreignco is entitled to receive as a refund, upon the repayment of its shareholder loan, is equal to the lesser of the amount of Part XIII tax paid by Canco at the time the loan was made to Foreignco and the amount that would be payable to the Receiver General under Part XIII if a dividend described in paragraph 212(2)(a), equal in amount to the amount of the loan repaid, were paid by Canco to Foreignco at the time of the repayment. At the time of the repayment, the amount of the dividend that would be subject to Part XIII tax would be the Canadian dollar equivalent of the amount that was repaid to Canco (i.e. Cdn$XXXXXXXXXX ). We also note that this is consistent with using the exchange rate on the date of repayment for the purposes of computing Canco's foreign exchange loss on the loan.

In our view, the amount of any refund that is payable under subsection 227(6.1) depends on the amount of the loan that is repaid, as measured in Cdn$ at the time of the repayment. Thus, to obtain a full refund under this subsection, the Cdn$ amount repaid must be equal to or greater than the Cdn$ amount of the dividend that is deemed to have been paid at the time of the loan. Where there is a fluctuation in the foreign currency in which a loan has been denominated between the time that Canco makes the loan to Foreignco and Foreignco's repayment thereof, the amount of Foreignco's refund of Part XIII tax will be limited to the amount determined under paragraph 227(6.1)(b) of the Act. Correspondingly, where Canco has sustained a loss by virtue of the fluctuation in the value of the currency in which the loan was denominated, Canco will be entitled to claim a capital loss pursuant to subsection 39(2) of the Act.

We trust that these comments are of assistance. If you wish to discuss any of the above, please contact the writer.

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch