Administrative Policy
2015 Ruling 2014-0541951R3 - Foreign Affiliate Debt Dumping
A U.S. corporation will indirectly subscribe for units in a (presumably U.S.) limited liability partnership (FA1) by subscribing for preferred shares in its two immediate Canadian subsidiaries (Canco1, the general partner of a Canadian LP (“LP1”), and Canco2, the limited partner), with those funds going down through a long stack of Canadian subsidiary LPs (starting with LP1) and corporations as preferred unit and preferred share subscription proceeds, so as to land in FA1. A number of months later, FA1 will pay a distribution proportionately to its partners, who directly comprise (i) a limited partner corporation (Canco9), and (ii) a general partner which is a general partnership (“GP”) - whose partners on a s. 212.3(25) look-through basis are two other indirect Canadian corporate subs in the group (Canco7 and Canco8). The ruling letter described FA1 as a (non-resident) subject corporation rather than as a Canadian partnership, and described the distribution as being deemed by s. 90(2) to be a dividend.
CRA ruled that Canco1 and Canco2 (at the top of the Canadian stack) will each be considered to be a QSC. The letter does not specify how the s. 212.3 effect of the investments made by the three CRICs (namely, the three direct or indirect partners of FA1 – or one CRIC if the partnership interests of Canco7 and Canco8 are nominal) is effectively allocated to the one or both of the QSCs.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(9) - Paragraph 212.3(9)(b) - Subparagraph 212.3(9)(b)(ii) | s. 212.3(9)(b)(ii) PUC restoration for upper-tier QSCs on the payment by a U.S. LLP of a proportionate “dividend” to lower tier CRIC partners | 349 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation | proportionate distribution by LLP treated as dividend | 128 |
| Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) | proportionate LLP distribution to three direct or indirect general or limited partners treated as dividend on single class of shares | 110 |
23 May 2013 IFA Round Table, Q. 6(h)
In response to a query as to whether a s. 212.3(3) dividend substitution election can be made even if there is no qualified substitute corporation in the group, CRA indicated that this election can be used even where there is only one Canadian corporation in the group. This permits the election to be used to determine which non-resident corporation received the s. 212.3(2) dividend, or which class of shares it was paid on - or the dividends to which the PUC suppression under s 212.3(7) would apply.
Articles
Philip Halvorson, Dalia Hamdy, "An Overview of the Foreign Affiliate Dumping Rules", (OBA article), 23 February 2016
Background to introduction of Foreign-Affiliate Dumping rules (p.2)
[P]art of the Advisory Panel’s mandate was to provide recommendations to improve Canada's international tax policy respecting investment into Canada by foreign businesses and foreign investment by Canadian businesses….[fn 5: The Advisory Panel on Canada's System of International Taxation, "Enhancing Canada's International Tax Advantage", 2008]… .
The Department of Finance adhered to the principles embraced in the Advisory Panel report by repealing the broader rules in section 18.2 and introducing the FAD Rules….
[W]hereas the initial flurry of amendments included substantive changes in direction and tax policy to the FAD Rules themselves, more recent changes could be described as substantive tweaks designed to allow the rules to work better within a certain policy framework. As such, it is more likely that future amendments will be designed as either tightening or relieving measures to fit within a now (generally) established framework.
Commentary
Draft s. 212.3(3) provides for a joint election to be made to allow for all or a portion of a dividend that would otherwise be deemed, under s. 212.3(2)(a), to be paid by a corporation resident in Canada (the CRIC) to its non-resident parent to instead be deemed to be paid by either the CRIC or another Canadian-resident corporation in the corporate group (a "qualifying substitute corporation," or "QSC") to either the parent or another non-resident corporation that at the relevant time (the "dividend time") does not deal at arm's length with the parent. Accordingly, instead of the dividend being deemed to be paid by the CRIC to the parent, there can be an election for the payor and recipient to be:
As noted in the Explanatory Notes accompanying the August 16, 2013 draft amendments:
Under the draft version of s. 212.3(3), the relationships are tested at the "dividend time" (as defined in draft s. 212.1(1.1)), namely, the investment time, where the CRIC is controlled by the parent at the investment time, and the first to occur of the CRIC becoming controlled by the parent and 180 days after the investment time, if the CRIC instead becomes controlled by the parent after the investment time but as part of the same series of transactions.
At a minimum, the joint election under s. 212.3(3) must be made jointly by the CRIC and the parent. In addition, any QSC which is to pay the deemed dividend must be a party; as must the non-arm's length non-resident corporation if it is to be the receipient of the deemed dividend. The election must be filed with the Minister on or before the filing-due date of the CRIC for its taxation year that includes the dividend time.
An election made under draft s. 212.3(3) is subject to the further application of draft s. 212.3(7), which potentially allow dividends that are otherwise deemed to arise under s. 212.3(3) to be offset against the paid-up capital of the "cross-border" shares of the QSC or CRIC in respect of which those dividends are deemed to be paid. Such PUC can also be reinstated, in certain circumstances, under s. 212.3(9).
CRA indicated (23 May 2013 IFA Round Table, Q. 6(h)) that a s. 212.3(3) dividend substitution election could be made even if there was no QSC in the group. This meant that even in these circumstances, the election could be used to determine which non-resident corporation received the s. 212.3(2) dividend from the CRIC. This point is now clear under the wording of draft s. 212.3(3): the election can be made for the dividend to be deemed to be paid by the CRIC to any non-resident corporation with which the parent does not deal at arm's length at the dividend time.