23 February 2007 External T.I. 2006-0187061E5 - Paragraph 80.4(2)(e) and Subsection 249.1(1)

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: 1) The meaning of "year" in paragraph 80.4(2)(e) of the Income Tax Act as it relates to a borrower that is a non-resident corporation. 2) How to determine the inaugural fiscal period in Canada of a non-resident corporation. 3) At what date does the inaugural fiscal period commence?

Position: 1) The "year" refers to the taxation year of the person to whom the paragraph applies. In this case, the taxation year of the non-resident corporate shareholder. 2) A non-resident corporation may select a fiscal period as long as it does not end more that 53 weeks after it commenced. 3) Generally, a non-resident corporation may commence its fiscal period no later than the day it commences activities in Canada. The commencement date of a non-resident corporation subject to a deemed interest benefit by virtue of subsection 80.4(2) could be no later than the date of inception of the loan.

Reasons: 1) Subsection 80.4(2) of the Act. 2) Generally, for Canadian tax purposes, a non-resident corporation would not be obligated to adopt the same fiscal period that it uses in its home jurisdiction. Pursuant to section 250.1 of the Act, a non-resident person's taxation year is generally determined in the same manner as Canadian residents. 3) Part XIII tax is an assessment as contemplated in subsection 249.1(1) of the Act and subsection 80.4(2) of the Act deems an interest benefit from the date of the loan inception.

								2006-018706
XXXXXXXXXX 							Joy Bertram,
	   							CGA, CPA(vt)
February 23, 2007

Dear XXXXXXXXXX:

Re: Paragraph 80. 4(2)(e) of the Income Tax Act (the "Act")

We are writing in response to your e-mail of May 17, 2006, wherein you requested our views on the meaning of "year" used in paragraph 80.4(2)(e) of the Act as it relates to a borrower that is a non-resident corporation. We apologize for the delay in responding.

Your Comments

In your view, the word "year" referred to in paragraphs 80.4(2)(d) and (e) of the Act means the "taxation year" referred to in the mid-amble of subsection 80.4(2), and although not expressly stated, the "taxation year" would seem to be the taxation year of the borrower. Paragraph 249(1)(a) of the Act provides that a "taxation year" in the case of a corporation is a "fiscal period" and subsection 249.1(1) provides that "a fiscal period" of a business or property of a person means the period which the person's accounts in respect of the business or property are made up for purposes of assessment under the Act. Thus, in your view, in most circumstances a corporation (either foreign or domestic) establishes its "fiscal period" and, thus, its "taxation year" for purposes of the Act, simply by selecting whatever initial fiscal period end it chooses. In your view, there is no requirement in the Act that provides that a corporation that has not established a taxation year to be deemed to have a taxation year ending on any particular date, nor is there a requirement that deems a non-resident corporation to have a taxation year that coincides with the fiscal period it may have adopted in its home jurisdiction.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by the Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out Information Circular 70- 6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to offer the following general comments, which may be of assistance.

We agree with you that the meaning of "year" as contemplated in paragraph 80.4(2)(e) of the Act refers to the taxation year of the person to whom the paragraph applies. In your particular case, that would be the taxation year of the non-resident corporate shareholder. We also agree that a non-resident corporation may select a fiscal period as long as it does not end more that 53 weeks after it commenced. Generally, for Canadian tax purposes, a non-resident corporation would not be obligated to adopt the same fiscal period that it uses in its home jurisdiction. Pursuant to section 250.1 of the Act, however, a non-resident person's taxation year will generally be determined in the same manner as Canadian residents.

Pursuant to subsection 15(9) of the Act, the subsection 80.4(2) benefit deemed to have been received by a person would be deemed to be a benefit conferred for purposes of subsection 15(1). Paragraph 214(3)(a) of the Act would then apply and the value of the benefit so conferred would be subject to Part XIII tax under subsection 212(2). In our view, Part XIII tax is an assessment as contemplated in subsection 249.1(1) of the Act as discussed above.

Generally, a non-resident corporation may commence its fiscal period no later than the day it commences activities in Canada. In our view, the commencement date of the fiscal period of a non-resident corporation subject to a deemed interest benefit by virtue of subsection 80.4(2) could be no later than the date of the inception of the loan, since subsection 80.4(2) deems an interest benefit from the date of the loan inception.

Further, it is worth noting that if any amount of the shareholder debt remains outstanding for one year after the taxation year-end of the lender in which the loan originated, the amount is included in the income of the borrower by virtue of subsection 15(2) of the Act. Pursuant to subsection 80.4(3), subsection 80.4(2) does not apply where any part of the loan was included in income. Where the shareholder is a non-resident, paragraph 214(3)(a) deems the amount included in income by subsection 15(2) to be a dividend so the corporation must withhold and remit Part XIII withholding tax under subsection 212(2).

We trust the above will be of assistance to you.

Yours truly,

Randy Hewlett
Manager
Business and Personal Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch