2014-0560401E5 Subsections 15(2) and 227(6.1) and Part XIII tax

Principal Issues: In the context of an assignment of a debt receivable in circumstances which had resulted in subsection 15(2) applying and Part XIII tax having been assessed, if the debt is subsequently repaid by the debtor to the new creditor, can the Part XIII tax assessed be refunded?

Position: Yes and the amount of the subsection 227(6.1) refund would be the lesser of: (a) the amount of Part XIII tax paid; and (b) the amount of Part XIII tax that would be payable if a dividend equal to the amount of the repayment were paid at the time of the repayment. The hypothetical dividend described in paragraph 227(6.1)(b) is a dividend paid by the original creditor described in the preamble to the debtor.

Reasons: The words of subsection 227(6.1) merely state that the person has to repay the loan. It does not state that the person has to repay the loan to the original creditor that initially made the loan.

Author: Hikspoors, Maryann
Section: 15(2), 15(2.1), 15(2.6), 214(2), 214(3)(a), 215, 227(6.1), Part XIII

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                                                                                                                                                             2014-056040
                                                                                                                                                             M. Hikspoors

April 24, 2015

Dear XXXXXXXXXX,

Re:   Repayment of a loan to a person other than the original creditor

We are responding to your email of December 4, 2014, in which you posed a query regarding our external interpretation 2013-0482991E5 which involved subsection 15(2) of the Income Tax Act (the “Act”) along with several other related provisions.

The situation described in our external interpretation 2013-0482991E5 involved Debtco, a non‑resident corporation, who became indebted to Canco, a corporation resident in Canada, which was wholly owned by Parentco, a non‑resident corporation.  It was further assumed that Debtco was connected with Parentco (for purposes of subsection 15(2)) and that Canco had an existing debt it owed Parentco. 

In the hypothetical scenario presented in 2013-0482991E5, Canco repaid its debt to Parentco by assigning its debt receivable from Debtco to Parentco. This assignment took place within one year after the end of Canco’s taxation year in which Debtco became indebted to Canco. We expressed our view that, absent novation of the debt, Canco’s assignment of its debt receivable from Debtco (the “Debt”) to Parentco would not constitute repayment of the Debt by Debtco to Canco for 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 subsection 212(2) would also remain.

Further to our comments in 2013-0482991E5, you now ask whether, when Debtco subsequently repays the Debt to Parentco, can Debtco request repayment of the Part XIII tax previously assessed pursuant to subsection 227(6.1)?

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70‑6R6, Advance Income Tax Rulings.

Unless otherwise stated, all statutory references in this letter are to the Act, as amended.

The words of subsection 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 that made the loan or indebtedness. Therefore, in our view, if the Debt is subsequently repaid to Parentco, Debtor may be entitled to a refund of the Part XIII tax previously assessed.

Furthermore, the amount of Part XIII tax that may be refunded pursuant to subsection 227(6.1) would be the lesser of:

>     the amount of Part XIII tax paid to the Receiver General in respect of the Debt; and

>     the amount of Part XIII tax that would be payable if a dividend described in paragraph 212(2)(a) equal to the amount of the Debt repaid were paid by Canco to Debtco at the time of the repayment.

We trust our comments will be of assistance.

Yours truly,

Lori M.  Carruthers CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

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