Subsection 17.1(1) - Deemed interest income — sections 15 and 212.3
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… .
Pertinent loans or indebtedness 17 January 2014
Interest income determined under section 17.1 of the Act should be reported by the CRIC on Schedule 125, Income Statement Information, under field code 8230, "Other revenue".
Corporation A, a non-resident corporation, controls Corporation B, a CRIC with a December 31 tax year-end. On January 1, 2014, Corporation A borrows $5,000,000 from Corporation B at 0% interest. By December 31, 2015, Corporation A has not repaid the loan. If Corporation A and Corporation B choose to elect under subsection 15(2.11) of the Act for the debt between them to be a PLOI, there is no Canadian withholding tax on a deemed dividend and, instead, Corporation B has deemed interest income starting January 1, 2014 at the regular prescribed rate (rounded to two decimal places instead of rounded up to the next whole number) plus four percentage points (4%).
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|Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.11)||amended return not expected/CRA will assess Part XIII tax after 2 years if late election not yet filed||203|
A non-resident corporation owes a foreign-currency denominated amount to a CRIC which is a pertinent loan or indebtedness (a "PLOI"), as defined in s. 15(2.11) or 212.3(11), and the CRIC has not made a functional currency election pursuant to s. 261(3). How is the s. 17.1 income inclusion computed in Canadian dollars under the A-B formula? After referring to the reference in s. 261(2)(b) to "the relevant spot rate for the day on which the particular amount arose," CRA stated:
The moment the PLOI arose is the moment the indebtedness has been created. Therefore, the prescribed rate of interest [referenced in A]… will be applied to the principal of the loan converted in CAN$ using the relevant spot rate at the time the indebtedness has been created. …
Element B of the formula is the amount actually included in the CRIC's income on account of the interest with respect to the PLOI. …The moment such an inclusion arises is the moment the interest is received or becomes receivable… .Therefore, provided subsections 12(3) and (4.1) ITA do not apply, such amount will be converted into CAN$ using the relevant spot rate at that time.
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|Tax Topics - Income Tax Act - Section 261 - Subsection 261(2)||prescribed interest on foreign currency PLOI translated at spot rate when loan made||186|
In respect of component (ii) of variable A in s. 17.1(1)(b), the correspondent asked:
Could the indirectly funded rule in s. 17.1(1)(b) be avoided through the use of cash damming techniques? For example, what if a CRIC sets up two bank accounts and uses account A to receive borrowings and fund business expenses and account B to receive business revenues and fund a PLOI, or alternatively, CRIC 1 uses its business revenues to fund a PLOI while CRIC 2 (a sister corporation, where there are no cross-shareholdings between CRIC 1 and CRIC 2 or inter-company debts), uses borrowings to fund its business expenses?
: It was intended that the application of s. 17.1(1)(b) would not be limited by the principle of "tracing," so that CRA would not concede that the proceeds of a debt obligation could not reasonably be considered to fund a PLOI simply because those proceeds were deposited into one account while the funds used to directly make the PLOI were withdrawn from another. It is CRA's general view that:
[I]t would be reasonable to expect that the proceeds from a borrowing had directly or indirectly funded, in whole or in part, a PLOI when a CRIC borrows money and, while the borrowing is outstanding, it makes a PLOI. Whereas, it is difficult to imagine circumstances in which it would be reasonable to consider that the borrowings of a sister Canco, where there are no cross shareholdings or inter-corporate debts, had directly or indirectly funded the PLOI of a CRIC.