S. 95(2)(g.1) applies on the basis of whether interest would be deductible from FAPI (pp. 2-3)
2002-0165195 … (the "2002 Technical") … [considering] that the forgiveness of a debt made by Canco to CFA1, the proceeds of which were used by CFA1 to acquire shares of CFA2 would not give rise to the application of the debt forgiveness rules because the debt was used to earn dividends from an FA and that such dividends are not to be included in the FAPI … . was overridden … in … 2004-0062175… (the "2004 Technical") … .
[Accordingly] one must look at whether the interest paid (or if interest is not actually payable, if interest had been payable) on the debt is deductible against FAPI and not at whether the asset acquired with the proceeds gives rise to FAPI. In these circumstances, the debt forgiveness rules may be a reason for Canadian MNEs to set up financing structures where a CFA of the group is financing the other CFAs rather than simply having the Canadian corporation finance the CFAs directly. This is mainly because the loans made by the CFA will generally qualify under 95(2)(a)(ii)((B)5 and (D),7 and thus the interest will not be deductible in computing FAPI.
Potential application of s. 248(27) where dual-use debt (p. 3)
[R]espect[ing] debt partly used for the purposes of earning FAPI and partly used for the purposes of earning active business income … the 2002 Technical … took the position that the whole amount of such debt would constitute a "commercial debt obligation" … .[T]his conclusion is questionable in light of subsection 248(27) which should apply to treat the debt as two separate debts.
Application of forgiven amount only under G of FAPI definition (p. 4)
[A] Forgiven Amount cannot be applied to reduce the various tax attributes of the debtor. The Forgiven Amount will either be applied against FAPLs or be carried forward to reduce any future year FAPLs.
Questionable CRA position that forgiveness does not increase surplus (p. 4)
2002-0165195 … provides that the "exempt earnings" or "taxable earnings" would not pick up forgiveness of a commercial debt obligation that did not relate to FAPI and that 5907(2)(/) would not be available, thus resulting in such income not being included in the exempt or taxable surplus of the FA debtor. … [T]his position is questionable given Regulation 5907(2)(f) and the definition of "earnings" in Regulation 5907 and may give rise to double taxation.
COVID-19 related deferral of foreign taxes may eliminate current FAT deduction (p. 5)
Assuming that an amount is not recognized as FAT until it is paid, the deferral of tax payments may give rise to unexpected surprises to Canadian corporations that are generally not paying any Canadian taxes on the FAPI incurred by its CFA. … [T]he result of deferring the payment of the foreign tax is that the FAT deduction will be reduced by four times the amount so deferred, thus potentially give rise to Canadian taxes.
Potential application of s. 248(27) to debt put to two uses (p. 3)
[R]espect[ing] debt partly used for the purposes of earning FAPI and partly used for the purposes of earning active business income … [2002-0165195] … took the position that the whole amount of such debt would constitute a "commercial debt obligation" … .[T]his conclusion is questionable in light of subsection 248(27) which should apply to treat the debt as two separate debts.
Email this Content