9 September 2002 Internal T.I. 2002-0149007 - BLENDED PAYMENT, INTEREST

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: whether blended payment

Position: no

Reasons: company policy, not 16(1) applies

		September 9, 2002

	International Tax Directorate	HEADQUARTERS
	HEADQUARTERS	TSO Corporate Financing Section
	 	Denise Dalphy, LL.B.
(613) 941-1722
	Attention: Mr. Mark O'Connor
	International Tax Advisor, Atlantic Region
		2002-014900

Re: XXXXXXXXXX ("Canco")

This is in response to your memorandum dated June 21, 2002 wherein you enquired about an assessment for the taxation years, XXXXXXXXXX, under Part XIII of the Income Tax Act (the "Act") and that is now under objection. In particular, you have asked whether subsections 16(1) and its corollary, subsection 214(2) of the Act will apply to the following fact situation.

Facts

1. A non-resident company, XXXXXXXXXX ("US Parent") made inter-company advances to its Canadian subsidiary, Canco.

2. US Parent charges interest to Canco on the inter-company advances.

3. The corporate policy of US Parent on inter-company advances includes the following provisions:

"3. Principal Repayment: principal amounts may be repaid periodically, but in any case no later than XXXXXXXXXX years from the date of the first advance.

4. Interest Repayment: Interest amounts are payable XXXXXXXXXX years from the date of the first advance.

5. Partial Payments: partial payments will be deemed to reduce the principal amount first, with any balance to reduce the interest amount outstanding."

4. The taxpayer advised that:

"1. The parties [XXXXXXXXXX] have agreed to certain mutually acceptable terms and conditions surrounding inter-company advances which are formally documented in the Corporate Policy _ Inter-company Advances...

2. The corporate policy indicates that the interest is to be calculated and recorded by both parties at a rate intended to "approximate fair market value". ...

5. The taxpayer also advises that the policy specifies that the interest rate should "be at the normal cost of borrowing funds from an outside source for the company and that the "reason for deferring the repayment of interest was simply to allow XXXXXXXXXX to "get on its feet" before having to pay the parent the interest charges."

6. We are uncertain as to how Canco has recorded the repayment of its inter-company advances on its income tax returns. You advise that all payments made by Canco during the audit period were treated as payments of principal. XXXXXXXXXX.

Unless there is other documentation available with respect to the inter-company advances that contradicts the Company Policy, we are of the view that there is no uncertainty with respect to the nature of the repayments of the inter-company advance, and therefore the deeming rule in subsection 16(1) of the Act will not apply. Since no rule will deem amounts of the repayments in the years under audit to be interest, the legal characterization of the amounts will apply, such that, when XXXXXXXXXX years of interest payments are made in year XXXXXXXXXX, Part XIII tax will apply at that time.

XXXXXXXXXX the only way to disregard the agreement between the parties [the Company Policy] is to recharacterize the transaction using section 247 of the Act. With respect to the potential application of section 247 of the Act, you may wish to consult with CCRA's specialists on transfer pricing.

Finally, with respect to section 78(1) of the Act, it does not apply unless there was a "deductible outlay or expense" and an amount is "owing". There is no indication that either of these criterion would apply to the years under audit.

We hope the above opinion will assist you. If you would like to discuss your case, please contact the writer.

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate

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