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.
Loan to Non-Resident - What is "Reasonable Rate"
Question
What is Revenue Canada's position concerning a reasonable rate of interest for purposes of subsection 17(1) on a loan denominated n foreign currency to a wholly-owned foreign subsidiary where the exceptions in subsections 17(2) and 17(3) do not apply. In the case of such a loan denominated in foreign currency, is the "...interest thereon computed at a reasonable rate ..." computed with reference to commercially available rates in the foreign jurisdiction or with reference to current Canadian rates?
Department's Position
Where "the loan remained outstanding for one year or longer without interest thereon computed at a reasonable rate having been included in computing the lender's income", subsection 17(1) may apply. It is a question of fact whether interest has been computed at a reasonable rate and all the factors involved in a particular financial arrangement have to be considered. While reference may be made to commercially available rates in the foreign jurisdiction as well as the current Canadian rates a reasonable rate of interest for the purposes of subsection 17(1) should in the circumstances of a particular case reflect the amount of interest the lender would expect to receive if the loan was made on an arm's length basis.
Prepared by: Jim Wilson
Date: Sept. 24/1991
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