(1.1)-(9)

The U.S. parent (XXXco1) of a Canadian corporation (Canco1) transferred a portion of its Class A common shares of Canco1 to a U.S. subsidiary (USco3) of XXXco1, and then had Canco1 pay a stock dividend on its Class A common shares (now held on a pro rata basis by XXXco1 and USco3) consisting of a new class of Class B common shares, so that the existing Class A common shares were diluted down to a nominal value, and the value of the newly issued Class B common shares (now embedding most of the value in the stack) being subject to 5% withholding tax. CRA ruled that s. 15(1.1) would not apply to this stock dividend.

Mr. X holds all 100 of Opco's Class A shares with a fair market value of $1,000,000 and nominal ACB and PUC. Opco pays a stock dividend comprising Class B shares which have a retraction right for $900,000; the 100 Class shares are exchanged for estate freeze Class C preferred shares; and the family trust subscribes for Class A shares for $10. (a) Does s. 15(1.1) not apply so that Mr. X only includes the $1 increase in PUC of the Class B shares in his income? (e) If the shares of the corporation instead were held equally by three shareholders and the steps otherwise were the same except that the new common shares would be issued to three family trusts, would s. 15(1.1) would apply to the stock dividend. CRA responded (Tax Interpretations translation):

…(a)…[S]ubsection 15(1.1) generally does not apply when a corporation pays a stock dividend solely to a person who holds all of the issued and outstanding shares…of the corporation.

…(e)..An increase or reduction in the value of the interest of a shareholder does not generally result if the stock dividend is payable to all the shareholders in proportion to their interest in the corporation, as would appear to be the case in [this] situation… .

Under a proposed ruling request, Canco, which directly owned approximately 99.99% of all the common shares of ForOpco, which was resident in Country A (with the other .01% held by another foreign affiliate of Canco), would reduce the number of outstanding shares by a factor of 100,000 (so that 100,000 previously outstanding shares would be represented by 1 share). ForOpco would return capital to Canco, which would use such funds to subscribe for additional common shares in ForHoldco (which was newly incorporated by Canco in Country B), with ForHoldco using those proceeds to invest in preferred shares of ForOpco. ForOpco then would pay a stock dividend, consisting of common shares, to ForHoldco. After the stock dividend, ForHoldco and Canco would hold approximately 99.8% and 0.2% respectively of the outstanding common shares of ForOpco.

In describing its refusal to rule that s. 15(1.1) did not apply to the proposed stock dividend, CRA noted that its purpose "was to transfer over 99% of the equity in ForOpco from Canco to ForHoldco," and that it is "not relevant whether the Canadian income tax effects of a stock dividend paid by a corporation would be similar to the effects of a transfer of shares under subsection 85.1(3), or under any other "rollover" provision."

In 2003, Opco made an interest-free loan to the adult child of its sole shareholder in order to pay the tuition fees of the child, who was not an employee. The child included the amount of the loan in his income in 2003 pursuant to s. 15(2) of the Act. It is anticipated that Opco will extinguish the debt owed to it by the child in 2006 when the child completes his education and is working full time.

After indicating that “the loan made by Opco to the shareholder's adult child does not appear to be a bona fide loan” so that s. 15(2) did not apply, and s. 56(2) applied instead to the individual shareholder, CRA went on to indicate that the forgiveness of the loan would not give rise to income under s. 15(1.2), stating:

The expression "forgiven amount" in subsection 15(1.21) refers, inter alia, to the meaning that would be given to that expression by subsection 80(1), which indicates, inter alia, that the lesser of the principal amount of the debt or the amount for which the debt was issued is reduced by the portion of the principal amount of an excluded obligation. “Excluded obligation" is a term also defined in subsection 80(1) to mean an obligation issued by a debtor the proceeds of which have, inter alia, been included in computing the debtor's income.

Thus, in the situation where the loan issued to the child was included in computing the child's income pursuant to subsection 15(2) in the taxation year in which the loan was made to the child, there would be no tax consequences to the shareholder or the child for the purposes of subsection 15(1.2) in the year in which the loan was extinguished.

ABCco carries on a written communications consulting business and does not carry on a money lending business in the ordinary course of its business. Mr. A, who is the sole shareholder, and who is the only employee other than a part-time clerical employee with less than 1/10 of his compensation, is lent $500,000 by ABCco to purchase another home for his personal use.

After concluding that the loan likely was not excluded under s. 15(2.4)(e), so that it was included in Mr. A’s income under s. 15(2), CRA went on to indicate that, on that basis, there would be no further inclusion in his income under s. 15(1.2) given (having regard to s. 15(1.21) that there had been the previous s. 15(2) inclusion.

On January 1, 2019, the Corporation (which had a calendar year) made the loan of $1,000, bearing interest at 5% per annum, to a shareholder (Mr. A). On December 31, 2020, Mr. A had not repaid the Loan or paid any interest. The interest on the Loan that was due on January 1, 2020 for the 2019 taxation year was $50 (the "2019 Interest").

Does the required inclusion of the $1,000 Loan amount in Mr. A's income for 2019 mean that no unpaid interest is required to be included in that same calculation pursuant to s. 15(2), and is the 2019 Interest a separate debt from the Loan for s. 15(2) purposes?

After describing its similar position in 2014-0526731C6 regarding s. 90(6), CRA stated:

[T]he 2019 Interest would be a separate debt from the Loan for the purposes of subsection 15(2). If the 2019 Interest was unpaid on December 31, 2020, the exception in subsection 15(2.6) would not apply … . Mr. A would then be required to include the amount of the 2019 Interest in his income for 2019 … regardless of whether the Loan was also included in Mr. A's income under subsection 15(2).

A partnership between Holdco1 as the 99.9% LP and Holdco2 as the 0.1% GP makes a $2 million non-interest-bearing demand loan to the taxpayer, the individual shareholder of Holdco1. CRA stated:

[S]ubsection 15(2) appears to be applicable…subject to the exceptions outlined in subsections 15(2.2) to 15(2.6), such that the

amount of the loan or indebtedness would be included in computing the income for the year of Taxpayer.... .

a loan from a controlled foreign affiliate to a related non-resident entity will not trigger the application of s. 15(2) and Part XIII.

CRA indicated that s. 15(2) can apply to a non-shareholder, non-connected employee who receives a loan from the employer to enable the employee to acquire treasury shares of the employer, if the employee subsequently becomes a shareholder in the same taxation year.

Two individuals equally own a corporation and have equal interests in a professional partnership. The corporation on-lends the proceeds of a loan received from a financial institution to the partnership at a slightly higher interest rate, with the partnership using the lent money in its operations instead of using a current line of credit.

Does s. 15(2) apply to the loan received by the partnership from the corporation? In responding affirmatively, CRA noted (as per its summary) that “[d]espite Gillette … we have repeatedly stated that the term "person connected with a shareholder of a particular corporation" in subsection 15(2.1) can include a partnership,” and further stated:

Since … the partnership and the corporation are owned by the same two individuals, we are led to believe that these individuals act in concert and control the partnership together, so that they are not dealing at arm's length with the partnership.

Does CRA agree with the TCC and FCA Gillette Canada decisions regarding the application of ss. 15(2) and (2.1)? CRA responded:

We disagree with the position taken in that case. … [O]ur position that subsections 15(2) and (2.1) may apply to situations involving partnerships is consistent with the tax policy underlying the application of those subsections. …

… CRA … appealed the Tax Court of Canada's decision. However, the Federal Court of Appeal, being of the opinion that other conditions necessary for the application of subsection 15(2) were not satisfied in this particular situation, did not comment on the application of the provisions to which you refer.

In 2003, Opco made a loan to the adult child of its sole shareholder in order to pay the tuition fees of the child, who was not an employee. The child included the amount of the loan in his income in 2003 pursuant to s. 15(2) of the Act. It is anticipated that Opco will extinguish the debt owed to it by the child in 2006 when the child completes his education and is working full time. CRA stated:

In a situation where it can be foreseen in advance that the lender will extinguish the debt, we question whether or not there is an obligation on the part of the borrower to return such sum.

CRA then indicated that “the loan made by Opco to the shareholder's adult child does not appear to be a bona fide loan” so that there was no inclusion in the child’s income under s. 15(2), and instead “the shareholder will be required to include the amounts paid by Opco to the child in income for the taxation year in which the amounts were paid pursuant to subsections 56(2) and 15(1).”

S.15(2) does not apply to a loan made by a corporation to an individual who only becomes a shareholder of the corporation after the loan is made.

RC's policy is that an employee will not be subject to a taxable benefit for the interest costs associated with bridge financing arrangements respecting the pending relocation of an employee where "all reasonable efforts" have been made to sell the employee's previous residence. RC notes that the first issue to be addressed is whether the executive is a shareholder of the company (given that the total amount of funds advanced were in excess of those that typically would be received by virtue of an individual's employment), and notes the factors that are relevant to the reasonable-efforts test if the individual received the loan by virtue of his employment.

A loan may still qualify after its transfer at fair market value to a related corporation by which the employee is also employed, because the transfer, by itself, will not result in a new loan agreement.

The acquired dwelling need not be located in Canada, and the shareholder's occupation of it as a vacation property for one month each year would qualify as habitation. However, acquisition for some other purpose, e.g., as an investment or occupation by relatives, would disqualify the property.

Because the application of s. 15(2) is determined only at the time the debt is incurred, it will not apply by virtue only of the debtor having become a shareholder at a later time.

A partnership (P), whose partners (FA1 and FA2) are foreign subsidiaries of Canco, borrows money from another foreign subsidiary (FA3) of Canco in order to fund the purchase of the shares of a foreign corporation (FA4) that are excluded property (EP). S. 93.1(4) deems P to be a non-resident corporation for the purpose of applying s. 95(2)(a)(ii)(D) (such that interest paid by P to FA3 will be included in computing the income or loss from an active business of FA3), but does not deem P to be a non-resident corporation for s. 15 purposes.

S. 15(2.2) provides that s. 15(2) does not apply to indebtedness between non-resident persons, and s. 15(2.1) provides an exception to s. 15(2) respecting certain foreign affiliates that are debtors. Does s. 15(2) apply in this situation?

CRA noted that ss. 15(2) and (2.1), in various places, for example, in the preamble to s. 15(2.1), specifically extend their application to partnerships, but that there is only a reference to a person, and not a partnership, when dealing with the carve-outs in ss. 15(2.1)(a) and (b) regarding dealings with foreign affiliates.

Accordingly, in this situation, there is a FAPI policy concern that has been brought to the attention of the Department of Finance.

Canco makes a loan to a partnership (“XXXXXXXXXX Partnership”) that is wholly-owned by an indirect U.S. parent of Canco (the general partner) and another non-resident partner within the group and whose business it is to make loans to group entities. That loan was subsequently repaid. In finding that s. 15(2) could be applied to the partnership, CRA stated:

The CRA did not succeed in the Tax Court of Canada (see Gillette v. The Queen, 2003 DTC 5078) which concluded that while a person could be connected to a shareholder of a corporation pursuant to subsection 15(2.1), it was not the same for a partnership. The Federal Court of Appeal also agreed with the taxpayer, but for different reasons. That is why we are still maintaining our position in our Interpretation 2003-0045851E5 and our comment in F2004-008411C6. We continue to believe that the term "person … connected with a shareholder of a particular corporation" as provided in subsection 15(2.1) may include a partnership.

A CRIC remits Part XIII tax under s. 214(3)(a) on the amount of a loan to non-resident "Parentco" and, more than two years after the end of the calendar year in which the Part XIII tax was paid, but within 3 years from the CRIC's filing due-date for the year the loan was made, the CRIC and Parentco jointly file a PLOI election, so that the loan is no longer subject to Part XIII tax. Would CRA refund the withholding even though the s. 227(6) application therefor was not made within the two-year limit specified in s. 227(6)? CRYA stated:

[The] written application for the refund [must be] made no later than 2 years after the end of the calendar year in which the excess amount was paid. …[B]ecause the application was not made within the two-year limit, the CRA is not able to refund the excess Part XIII tax. However…the scenario… described is…unlikely to occur except in rare circumstances.

Can a s. 15(2) loan made to a non-resident person prior to March 29, 2012 ("Original Loan") be transitioned to the pertinent loan or indebtedness ("PLOI") regime by repaying it and re-lending the same amount after March 28, 2012 so that the new loan ("New Loan") qualifies for a PLOI election? CRA stated:

[O]nly new, post-March 28, 2012 loans or indebtedness that are not part of a Series of Loans [described in s. 15(2.6)] that include the repayment of a pre-March 29, 2012 loan or indebtedness can benefit from the PLOI regime. …

However, where subsection 15(2) and consequently Part XIII withholding tax had applied to a loan or indebtedness that is part of a Series of Loans, it will not apply again to the same amount of another loan or indebtedness in the Series of Loans. … Therefore, subsection 15(2) would not apply in respect of the New Loan such that the requirement in paragraph 15(2.11)(a) that the loan otherwise be subject to subsection 15(2) will not be satisfied. As such, the PLOI election in respect of the New Loan cannot be made or, if it was made, it would be considered invalid with the result that no interest income under subsection 17.1(1) would be imputed to the Canadian lender in respect of the New Loan.

Debtco, a non-resident corporation which is connected to the non-resident wholly-owning parent (Parentco) of Canco, became indebted to Canco before March 28, 2012. Debtco replaces its pre-March 28, 2012 indebtedness to Canco with a new loan or indebtedness to Canco. Would this constitute a "series of loans and repayments?" After stating that "Parliament's specific requirement that an amount become owing after March 28, 2012, as set out in paragraph 15(2.11)(b), in order for the amount to qualify for PLOI treatment must be respected," CRA responded:

[I]f a pre-March 28, 2012, debt is replaced with a newer debt of the same or substantially similar amount, the transactions may constitute a series of loans or other transactions as discussed in ¶ 28 of IT-119R4 … However, as discussed in ¶ 29 of IT-119R4 ... all of the relevant factors would need to be considered to determine whether a series of loans or other transactions and repayments existed and bona fide repayments would not be seen as part of a series of loans or other transactions and repayments.

Is the CRIC required to file an amended return, on late-filing a PLOI election, to reflect the additional s. 17.1(1) interest income? CRA stated:

[A] valid PLOI election must … include the details indicated on …Pertinent loans or indebtedness … .You may also wish to include a calculation of the change in income of each affected taxation year. Accordingly, the election will contain enough information to enable the CRA to assess the tax consequences. Therefore … the CRIC would not be required to file an amended corporate tax return… .

Where a PLOI election is available, but not yet filed, will CRA assess Part XIII withholding tax on the loan amount after the end of the second taxation year, or wait until after the three year period late filing period? CRA stated:

Where a taxpayer may file any election, but has not done so, the CRA is required to assess on the basis that no election has been filed. Therefore ….where a PLOI election is available but is not yet filed, the CRA should assess the Part XIII withholding tax on the deemed dividend when the CRA would normally do so. If a late-filed PLOI election is subsequently made, the tax liability would be reassessed at that time.

Blanket election

Although a taxpayer may file a single written communication containing a PLOI election for various particular amounts owing, that single communication is considered to constitute one election per particular amount owing.

Multiple CRICs

In the case of an amount owing to a qualifying Canadian partnership in respect of the foreign controlled CRIC, the joint election would be filed by all the partners and a non-resident corporation that controls the CRIC. Where more than one foreign controlled CRIC is a partner, s. 15(2.11)(d)(ii) would be satisfied if the joint election were filed with the Minister on or before the latest of the relevant filing-due dates of those CRICs.

A corporation resident in Canada (“CRIC”) has balances of accounts receivable reflecting the accumulation of hundreds of sales including to related non-resident companies such that within the past two taxation years s. 15(2) or 212.3(10)(c) became applicable. PLOI elections will now be late-filed. Does an “amount” arise for each intercompany sale and, if so, would CRA administratively accept that there was one accumulated “amount” for the year (or some shorter period) for penalty-computation purposes? CRA responded:

[E]ach intercompany transaction resulting in a receivable…and therefore, each incremental increase in the total accounts receivable balance should be treated as a unique amount of indebtedness.

As a result, the PLOI election will have to be made in respect of each such amount, notwithstanding that a taxpayer may prepare and file a single written communication for the various amounts owing. It follows then that, based on the language of subsections 15(2.13) and 212.3(13), the penalty calculations should also be done separately for each such amount. …

We have consulted with the International, Large Business and Investigations Branch (formerly the Compliance Programs Branch) to determine whether an administrative position could be taken in the situation described above to aggregate certain amounts receivable for purposes of the PLOI elections penalty calculation and, if so, whether such aggregation should be made on an annual, quarterly, or monthly basis.

The possibility of providing administrative relief in this regard is currently under review.

With respect to a loan by a wholly-owned foreign affiliate of a Canadian corporation ("Canco") to a non-resident corporation that was related to Canco but not a foreign affiliate of any person resident in Canada, RC indicated that "in the event the above transactions were part of a series of transactions that was designed to avoid the application of subsection 15(2) to monies acquired by a shareholder or a corporation connected to the shareholder of Canco, the series of transactions may be considered a misuse of subsection 15(8) of the Act and subsection 245(2) may apply".

Canco, which is a grandchild subsidiary of Parentco (a resident of Country 1), borrows money from time to time under note offerings in Canada or through issuing commercial paper in Canada, in each case, under a Parentco guarantee, and uses the proceeds to make interest-bearing loans (at not less than the rate prescribed under Regulation 4301(c), and at a positive spread, and at a term of X to Y years) to non-resident members of the Parentco group which are not foreign affiliates of Canco.

Rulings that such loans will be exempt loans under s. 17(15) and will not be subject to s. 15(2) by virtue of s. 15(2.3), and that there will be no income inclusion under s. 17(1).

A corporation whose business it was to purchase and sell shares of private and public corporations, sold all its shares and used the proceeds to make secured loans to its shareholders at the prescribed interest rate and to third parties at the market rate, for initial terms of five years that would be renewable. Does the exception in s. 15(2.3) apply? In the course of a general response, CRA referred to its position in IT-442R, and stated:

[Y]ou assumed that the principal business of Corporation A is to lend money to its shareholders and to third parties. However, before accepting the validity of such an assumption, we wish to ask the following two questions. First, does Corporation A carry on a business of lending money on a regular basis? Second, was that business being carried on when the shareholder loans were made? Only when the shareholder loans are made while Corporation A is carrying on the ordinary business of lending money will subsection 15(2.3) apply.

Non-resident bondholders make a loan to a corporation ("Finco") which is wholly-owned by a charitable discretionary trust and Finco lends the money at a positive spread. to a construction project limited partnership.

Ruling that s. 15(2.3) will apply to the loan to the limited partnership.

Cansub is a wholly-owned subsidiary of Canco which, in turn, is wholly-owned by MNC, a non-resident multi-national corporation. All the treasury functions for the group are carried out by Cansub. Cansub lends to non-resident subsidiaries of MNC (Foreign Subs) at market rates of interest, and bona fide arrangements are made for repayment of the loans within a reasonable period of time.

CRA stated:

Cansub only lends money to the members of the Group with whom it does not deal at arm's length. One would expect that in an ordinary business of lending money, loans would be made to arm's length persons. Hence, it may be that any loan made by Cansub to the Foreign Subs cannot be said to be made in the ordinary course of Cansub's ordinary business of lending money. …

In the event that a corporation's business includes the making of loans but those loans cannot be viewed as having been made in the corporation's ordinary business of lending money, it is our view that those same loans cannot be considered as "debts that arose in the ordinary course of the creditor's business". ... [W]here a loan is made by a taxpayer as a lender, the phrase "a debt that arose in the ordinary course of the creditor's business" in subsection 15(2.3) is not applicable to that taxpayer in respect of the loan. That phrase is meant to cover situations where an indebtedness other than a loan occurs... .This is so because a lender/borrower relationship is more specific than a creditor/debtor relationship.

Non-resident term lenders make a loan to a newly-incorporated wholly-owned subsidiary ("Finco") of the general partner of a Canadian limited partnership that is a subsidiary partnership (through an intermediate unit trust) of an income fund. Finco on-lends on similar terms to the limited partnership.

Ruling that s. 15(2.3) will apply to the advances from Finco to the limited partnership.

Ruling that s. 15(2.3) will apply to a loan made by an indirect special purpose finance subsidiary of an income fund to an indirect general partnership subsidiary of the income fund that is funded out of the proceeds of a cross border loan made to Finco.

Where a loan which previously had been exempted under s.;15(2.4)(c), (e) and (f) subsequently was assigned to a partnership without being novated, the loan would still meet the exception in s. 15(2.4)(c) subsequent to this assignment.

Where a loan is received by an employee who is not a specified employee at that time, but later in the year becomes a specified employee, the exception in s. 15(2.4)(a) will be available.

Where changes to an original loan result in its novation, the new loan, because it serves to refinance an existing debt, will not qualify for the exemption in s. 15(2)(a)(ii). The comments in IT-448 are of assistance in determining whether the changes are sufficient to have resulted in a disposition of the previous loan.

Where a loan made by the corporation to the employee exceeds the amount used for a qualified purpose (in this case, because the loan proceeds were used to acquire farm land in addition to the principal residence situate thereon) the entire amount of the loan will be included in income under s. 15(2) notwithstanding that a part of the loan was used for a qualified purpose.

When asked whether the exemption would apply to the making of a loan of $100,000 for the acquisition by an individual of a 20-year lease of a cottage property on an Indian reservation, RC stated that:

"The ordinary meaning of the word 'dwelling' is not broad enough to include a leasehold interest in a dwelling".

"It is our view that a loan will not meet the exclusion requirements of subparagraph 15(2)(a)(ii) of the Act where the individual to receive the loan is not the same individual to acquire the dwelling."

Accordingly, the exclusion is not available where the purpose of a loan to an employee is to enable the employee to give the proceeds to his spouse so that she can acquire a dwelling in which they will reside.

"Further, where the prima facie purpose of the loan is for a purpose other than the acquisition of a dwelling (such as gifting the proceeds to a spouse or other person), it is our opinion that the loan may fall outside the requirements of subparagraph 15(2)(a)(ii) ..."

Commercial housing loans specify a term (the maximum of which is normally seven years) under which the loan can be renewed, at which point the lender will assess whether to extend the loan and charge interest at the relevant rate pursuant to circumstances existing at that time. Accordingly, a loan with a 25-year amortization period that does not provide for any renewal during that term will not accord with commercial lending practice, with an increased likelihood that the arrangement may not be viewed as being bona fide.

RC also noted that "a housing loan amortized over 25 years, and renewable every five years, at a prescribed rate of interest would be considered to be consistent with normal commercial practice ... ."

An employee housing loan which was repayable over a 25-year period would not have a reasonable repayment term, although a repayment or renewal term of five to seven years with a 25-year amortization period (or a 10-year amortization period for a summer home) would be considered reasonable. A non-recourse mortgage also may not be exempted by s. 15(2)(a)(ii).

If under the terms of a separation agreement entered into some years after the acquisition of the home, the employee must leave the home, s. 15(2)(a)(ii) will continue to apply to the loan.

Where the amount of a loan from an employer in respect of a recreational property ordinarily inhabited by the employee is in excess of the proportionate cost of the house and land that is reasonably required for the use and enjoyment of the houses as a dwelling, the entire loan is subject to s. 15(2). Generally, RC will not dispute that up to 1/2 hectare of land subjacent or contiguous to the dwelling is reasonably necessary to the use and enjoyment of the house as a dwelling.

CRA indicated that where a corporation with calendar taxation years makes an interest-bearing loan to its individual shareholder, and the accrued interest is still unpaid at the end of the following year, s. 15(2) will apply separately to such accrued interest amount (to include it in the individual’s income) regardless of whether the loan principal amount was also included in the individual’s income under s. 15(2).

Although on a literal reading, there also could be imputed s. 80.4(2) interest on such unpaid interest amount, CRA that "accrued interest such as …Interest in th[is] Particular Situation does not meet the meaning of ‘debt’ in the context of a textual, contextual and purposive interpretation of subsection 80.4(2),” so that no such imputation would occur whether or not the loan was repaid before the end of the corporation’s second taxation year.

A shareholder (Taxpayer A) who received a loan from a corporation in 2017, repaid the loan at the end of 2018 (after filing Taxpayer A’s 2017 return).

CRA stated that “Taxpayer A does not have to include the amount of the loan or debt in the taxpayer’s income for the 2017 year because the application of subsection 15(2) is suspended until the time period in subsection 15(2.6) has passed,” but that s. 80.4(2) “would apply for the entire period during which the loan or debt was not repaid.”

If instead the loan was not repaid but the taxpayer wished to correct the situation at the beginning of 2019:

Taxpayer A could ask the CRA to correct the taxpayer’s income tax return for 2017 to include in the taxpayer’s income the amount of the loan or debt under subsection 15(2). Moreover, if Taxpayer A had included an amount in the taxpayer’s income by virtue of subsection 80.4(2), that amount would be backed out from the income of Taxpayer A, as subsection 15(2) takes precedence over section 80.4 under paragraph 80.4(3)(b).

Canco (along with other members of the group) was part of a “physical” cash pooling arrangement with a non-resident affiliate (Finco) under which funds were automatically transferred to and from Finco by way of daily cash sweeps. Interest income and expense was calculated monthly on the net balance. Due to fluctuations in Canco’s position, it was both a net lender and a net borrower for various periods during the taxation years in question. The only question posed was whether the daily cash sweeps were to be considered to be a series of loans or other transactions and repayments. After noting the restrictive interpretations accorded to this phrase in Attis, Uphill and Meeuse, the Directorate nonetheless concluded:

[T]he Cash Pooling Arrangement appears to be structured in a manner that results in automatic daily cash sweeps which produce a “rolling forward” of the inter-company loans from Canco to Finco. If that is the case, we believe that a respectable argument could be made that the automatic daily cash sweeps constitute a series of loans or other transactions and repayments and as such, the exception under subsection 15(2.6) should not apply as it would otherwise result in a perpetual deferral of the inclusion under subsection 15(2).

Canco assigned a loan (the "Debt") owing to it by a non-resident sister company to their non-resident parent (Parentoco) in repayment of a loan owing by it to Parentoco. As per 2013-0482991E5 below, this assignment did not qualify as a repayment of the Debt (so that s. 214(3)(a) applied to impose Part XIII tax on the Debt amount), unless it was novated. If Debtco subsequently repays the Debt to Parentco, can Debtco obtain a refund of such tax under s. 227(6.1)? CRA responded:

[S]ubsection 227(6.1) merely state that the person has to repay the loan or indebtedness. It does not state that the person has to repay the loan or indebtedness to the original creditor… . Therefore … if the Debt is subsequently repaid to Parentco, Debtor may be entitled to a refund of the Part XIII tax previously assessed.

CRA indicated that it does not have the discretion to not apply s. 15(2), where the applicable statutory exceptions are not available, to amounts that become owing to Canco by a non-resident affiliated Finco in connection with a cash pooling or other centralized cash management arrangement for a multinational group. However, CRA stated that

in the context of subsections 15(2) and (2.6), unless the facts indicate otherwise, the CRA generally accepts that repayments are applied to loans or indebtedness utilizing the method "first in first out" method

i.e., unless the debtor otherwise specifically applies the repayment, it is applied to the oldest debt first.

Debtco, a non-resident corporation which is connected to the non-resident wholly-owning parent (Parentco) of Canco, is indebted to Canco. Canco repays a debt owing by it to Parentco by assigning its debt receivable from Debtco to Parentco within one year after the end of Canco's taxation year in which Debtco became indebted to Canco. Does s. 15(2.6) apply to prevent an income inclusion under s. 15(2)? CRA stated:

[A]bsent novation of the debt … Canco's assignment of its debt receivable … would not constitute repayment of the debt by Debtco to Canco for the purposes of subsection 15(2.6). Since the debt would not be repaid as required under subsection 15(2.6), subsection 15(2) would continue to apply and the Part XIII tax imposed pursuant to paragraph 214(3)(a) would also remain. … If on the other hand, the debt was novated … section 245 may apply … .

underline;">: Structure/accounting standards. Parentco, a non-resident and an indirect subsidiary of non-resident Pubco, wholly-owns Canco. Parentco's other subsidiaries are non-resident. Parentco's and Pubco's financial statements are prepared in accordance with IFRS and ASC, respectively.

Description of Notional Cash Pool

Parentco and a number of the non-resident Members have cash shortages from their operations which are funded by deficits in their accounts with "Non-resident Bank." Under a "Notional Cash Pool" structure, excess cash of each Member of the Group is regularly transferred from the Member's local bank account to its account with Non-resident Bank and, conversely, where a Member needs funds, there is a transfer from its account with Non-resident Bank to its local bank account, so that its account balance with Non-resident Bank may be in a deficit position. However, an account balance legally is an asset or liability, as the case may be, of the Member itself and no cash sweep to Parentco or another Member occurs. A single interest rate is applied by Non-resident Bank, whether a Member account is in a credit or debit position.

Upstream quarter-end advance

Canco will make an unsecured interest-bearing loan to Parentco (presumably, shortly before each quarter end or year end) of an amount equal to its excess cash on deposit with Non-resident Bank on each such date, resulting in the lent amount being drawn down from Canco's account with Non-resident Bank and being deposited to Parentco's account with Non-resident Bank. Each loan will be repaid by its due date of four days later by the amount owing being drawn down from Parentco's account with Non-resident Bank and being deposited to Canco's account with Non-resident Bank. Similar transactions will occur at the same time between Parentco and other Members.

Financial statement presentation purpose

"Parentco and Pubco are of the view that a company reporting a net balance of cash and cash equivalents is regarded by the readers of financial statements as a demonstration of the company's competence in the management of its funds...[and that therefore] off-setting assets and liabilities…has a positive impact on how shareholders…value a company. …The Proposed Transactions will be undertaken for the purpose of permitting Parentco and Pubco to prepare consolidated financial statements…on a basis that reports the Group's net cash position of the accounts in the Notional Cash Pool."

Ruling

"The making of each of the Loans together with the repayment of each of the Loans will not, in and of themselves, be considered a series of loans or other transactions and repayments for the purposes of subsection 15(2.6)… ."

Ruling rationale (per summary)

The "series of loans ... and repayments" referred to in subsection 15(2.6) is intended to prevent, by temporary repayment, a deferral of the recognition as income of amounts that are advanced as loans, rather than paid to the borrower as dividends, fees, bonuses or other amounts that would be included in the borrower's income. The four 4-day loans made in this case are not for the purpose of deferring the recognition of the loaned amounts as income, and the repayment of each loan in this case is not temporary.

Facts

Each year, Aco makes monthly advances to its sole individual shareholder, A; and each year Aco pays a dividend to A which has the effect of repaying part of such advances. Aco shows the remaining balance of the advances as an asset in its annual financial statements.

Question

If each of the advances incurred by Aco in the course of a taxation year of Aco is repaid within one year following the end of the taxation year of Aco in which the advance arose, would s. 15(2.6) apply where there is an outstanding balance of advances at the end of each taxation year of Aco?

Response

After quoting IT-119R4, paras. 27-29, CRA stated (TaxInterpretations translation) that "subsection 15(2.6) could apply in the given situation ."

CRA was asked in the context of s. 212.3(10)(c)(i) whether it would accept FIFO as the method to track the origination and settlement of multiple debts that may arise from inter-company dealings or cash pooling; and whether it would consider a "series of loans" to arise where there are inter-company dealings or cash-pooling but each item arises for its own reasons and not in contemplation of recycling an existing item.

After stating that “the repayment rule in subparagraph 212.3(10)(c)(i) is similar to the rule in subsection 15(2.6) that applies in the shareholder debt context,” CRA stated:

(i) If a particular amount owing is made up of several amounts owing of the same nature (for example as the result of numerous individual acquisitions of product or services on credit), we would accept FIFO as the method to track the origination and settlement of multiple amounts owing. Whereas, if a particular amount owing is made up of several amounts owing of different natures (for example one amount owing may be secured and payable at maturity whereas another amount owing may be unsecured and payable in installments and/or the amounts owing may have different interest rates), we would expect the debtor to specify which amount owing is intended to be repaid by a particular payment.

(ii) Our views on whether the repayment of a particular amount owing is part of a series of loans or other transactions and repayments are set out in Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders. … Specifically, however, repayments of a temporary nature (for example, certain cash pooling arrangements) may be evidence of a series of loans and repayments.

A shareholder loan repaid by the executors of the shareholder within one year after the end of the creditor's taxation year in which the loan was made will be treated in the same manner as a repayment by a surviving shareholder.

CRA stated that where the loan is not repaid by the estate within one year:

[T]he Estate can claim the deduction under paragraph 20(1)(j) in the year a repayment is made to the extent that the deceased person had included the amount of the loan in computing his or her income pursuant to subsection 15(2) in a preceding taxation year….[H]owever…CRA has indicated in technical interpretation 9918015 that [this] position in paragraph 32 of IT-119R4 does not apply where the loan is subsequently repaid by a beneficiary of the Estate.

Before indicating that repayments made in 2011 (which exceeded the shareholder loan balance at the end of 2010), likely could be applied first against such 2010 indebtedness, so that there would be no income inclusion under s. 15(2), CRA stated:

The CRA's current position is that a "series" is generally restricted to a situation where a repayment is made shortly before the year-end of the corporation and the same amount, or substantially the same amount, is borrowed shortly thereafter in the immediately following year. This payment is not considered by the CRA to be a legitimate repayment... .

Generally speaking, repayments in a given fiscal period are applied to the oldest outstanding indebtedness of the shareholder unless the facts clearly indicated otherwise (i.e. where the shareholder has specifically allocated payments on another basis and has communicated this to the corporation).

In indicating that a cash pooling arrangement entered into by a Canadian subsidiary with its non-resident parent corporation could result in an income inclusion under s. 15(2), Revenue Canada indicated that its review of the jurisprudence on s. 15(2) suggested that debts between a shareholder and a particular corporation do not generally offset for purposes of determining either whether the shareholder became indebted to the corporation in the first place, or whether that indebtedness has been repaid.

The CCRA gave a generally favourable response to a question asking for confirmation that the exception in s. 15(2.6) will apply where loans are repaid as part of a series of loans and repayments, provided the series is terminated within one year after the end of the taxation year in which the loan was made. A detailed analysis of a shareholder's loan account will determine whether there has been a bona fide repayment of the loan or other indebtedness and whether the series of loans or other transactions and repayments has terminated.

Yco, a Canadian manufacturing subsidiary of Xco with a calendar year, regularly purchases items from and sells items to Xco in the ordinary course of its business, resulting in a trade account payable to/receivable from Xco at any given time. Other than this, there is no history of lending between them.

In early 1992 Yco made an interest-bearing loan to Xco, due December of 1993, and proposes to make further interest-bearing loans to Xco, also due in December 1993, in order to assist Xco in meeting certain financial obligations. No further loans will not be required after 1993. In commenting on the exception in what now is s. 15(2.6), CRA stated:

It is acceptable to have a repayment of an older loan and to make a new loan in the same year around the same time if the facts support the transactions. Given a situation where an earlier loan is made for a specific purpose, say to purchase equipment, and is to be repaid on or before a given date and subsequently another loan is made for a specific purpose, say to purchase land, around the date the earlier loan is repaid, we would accept this as being a repayment of an earlier loan and a new loan having been made, rather than insisting that it is part of a series of loans and repayments. On the other hand, if there are numerous non-specific loans and non-specific payments, it would be considered as being part of a series of loans and repayments, in which case the increases in a particular year-end balance would be treated as a loan in that year and a decrease in a year-end balance would be treated as a repayment.

Canco makes loans in 1992 and 1993, evidenced by promissory notes, to its U.S. parent, with the loans being repaid by the end of 1993. Would such repayments be part of a series if a new laon were made in 1994?

The Directorate stated:

It is acceptable to have a repayment of an older loan and to make a new loan in the same year around the same time if the facts support the transactions. Given a situation where an earlier loan is made for a specific purpose, say to purchase equipment, and is to be repaid on or before a given date and subsequently another loan is made for a specific purpose, say to purchase land, around the date the earlier loan is repaid, we would accept this as being a repayment of an earlier loan and a new loan having been made, rather than insisting that it is part of a series of loans and repayments. On the other hand, if there are numerous non-specific loans and non-specific payments, it would be considered as being part of a series of loans and repayments, in which case the increases in a particular year-end balance would be treated as a loan in that year and a decrease in a year-end balance would be treated as a repayment. …

It is the Department's long standing practice not to regard an offset of a shareholder's loan account debit balance against a dividend payable as part of a series of loans and repayments for purposes of paragraph 15(2)(b)... .

Where trade accounts receivable arise from sales of a subsidiary corporation to its non-resident parent, the creation of each account receivable and the subsequent repayment will be regarded as a separate transaction and not part of a series of other transactions and repayments (respecting the other receivables). The subsidiary can apply repayment to its oldest outstanding trade accounts receivable.

Dozens of collectible vehicles that are treated by a corporation as an investment but its shareholder, who has control of the vehicles at all times, uses them very little, except for their required maintenance of the vehicles. Assuming that s. 15 applies, how should the taxpayer compute the benefit? After noting that under s. 15(5) the value of the shareholder benefit was determined through the application, with the necessary modifications, of the ss. 6(1), (1.1), (2) and (7) rules, CRA stated:

[W]here the employer and the employee agree and the employee has not been assigned an automobile on a long-term or exclusive use basis, the CRA allows taxpayers to establish the amount of a reasonable standby charge using a method that takes into account the average cost of automobiles. In short, under that method, all automobiles that are made available to an employee at any time during the calendar year are grouped into purchase-cost dollar ranges not exceeding $5,000 and the average cost of each range becomes the purchase cost of the cars made available to the employee for the period. Once the average purchase price of an automobile is determined using this method, the employer calculates the usual standby charge for the use of one automobile in each price range in accordance with the provisions of subsection 6(2) and paragraph 6(1)(e).

The question of whether or not an employee has been assigned an automobile long-term or for the employee’s exclusive use is a question of fact ... .

An employee, after being subject to a standby charge for four years pursuant to s. 6(1)(e), purchased the automobile from his employer for less than its fair market value at that time.

After indicating that the employee received a benefit under s. 6(1)(a) equal to the discount from FMV without any reduction for the standby charges previously included in his income, CRA went on to indicate that if the individual received the benefits qua shareholder:

[S]ubsection 15(1) would apply to the taxpayer in respect of the purchase of the automobile. The benefit calculated for the purposes of that subsection would not be reduced by the amount of the standby charge benefit that would have been computed pursuant to subsection 15(5) in the years before the shareholder purchased the automobile.

In the course of finding that the gratuitous use by the non-resident shareholder of a Canadian property of the non-resident corporation likely produced a s. 214(3)(a) deemed dividend that was subject to Part XIII tax under s. 212(2), CRA noted:

[S]ubsection 15(7) makes subsection 15(1) applicable whether or not the corporation has been resident in Canada or has carried on a business there.

Using funds generated from operations, Opco, which is a foreign affiliate both of its parent (Canco) and grandparent (Can Holdco ), subscribes for equity of Finco (another FA of Canco) which, in turn, makes a non-interest bearing loan to Foreign Sub, which is a direct subsidiary of the parent of Can Holdco (Foreign Parent). As this loan is repaid within two years, s. 90(6) does not apply to the loan. Did the interest-free loan generate Part XIII tax and, if so, who had the obligation to collect and remit the tax – and how could it be collected? The Directorate responded:

[S]ubsection 80.4(2) applies to deem Foreign Sub to have received a benefit in an amount computed based on the prescribed rate. Subsection 15(9) then provides a deeming rule that transforms the subsection 80.4(2) benefit into a shareholder benefit under subsection 15(1). …

If subsection 15(1) could only apply where there was a direct shareholder relationship between the benefit recipient and the benefit conferrer, it would not only render the “connected” concept under subsection 80.4(2) meaningless, but also would imply that the only purpose of subsection 80.4(2) is to provide a formula for the calculation of a subsection 15(1) benefit. …

As the “shareholder” in subsection 15(1), Foreign Sub would be the taxpayer who is deemed to have received the dividend under paragraph 214(3)(a), and it is therefore Foreign Sub who is liable for the withholding tax imposed under subsection 212(2). ...

[T]he person who makes the loan on which the subsection 80.4(2) benefit arises (i.e. Finco) is the person who is required to withhold and remit the Part XIII tax.