CRA rules that the back-to-back loan rule in s. 90(7) precluded the application of s. 90(6) to “upstream” loans made by a CFA to specified debtors

A non-resident subsidiary of Canco (“CFA”) had used the proceeds of loans received from third-party banks and through bonds issued in its country of residence to make loans under the same terms and conditions (i.e., tenor, interest rate, and currency) as the 3^rd-party bank or bond borrowings, plus cross-charged guarantee fees, directly to Finco 1 and Finco 2, which were non-resident “sisters” of Canco and CFA, i.e., Finco 1 and Finco 2 were “grandchild” or “greatgrandchild” subsidiaries of the non-resident parent of Canco. Thus (before considering s. 90(7)), Finco 1 and Finco 2 were “specified debtors” in respect of Canco. In most cases, each such 3^rd-party was opened on the same day as the subsequent on-loans to the Fincos, although in a few cases, there was a gap of up to 13 days.

Canco will sell all of its shares of CFA to Canco’s foreign parent for cash consideration equal to their fair market value and elect under s. 93(1) to the extent of any capital gain.

CRA effectively ruled that the back-to-back rule in s. 90(7) deemed the actual loans from the third-party lenders to CFA, and by CFA to the Fincos not to exist and deemed those third party lenders to have made their loans directly to the Fincos on the same terms as the (actual) loans to the Fincos by CFA. Accordingly, s. 90(6) would not apply to require any inclusion in Canco’s incomes in respect of CFA’s loans to the Fincos.

Neal Armstrong. Summaries of 2024 Ruling 2024-1027391R3 under s. 90(7) and s. 90(8)(a).