2016-0673661I7 Upstream loans – allocation of repayments

Principal Issues: Would the CRA follow the “first in, first out” method to allocate repayments in respect of multiple draws on a single credit facility?

Position: Yes, unless a specific designation is made to the contrary.

Reasons: Applicable jurisprudence.

Author: Grégoire, Sylvain
Section: 90(6); 90(8); 90(14)

                                                                                                                               March 3, 2017

Ms. Marian Young                                                                                                  HEADQUARTERS
Senior International Auditor                                                                                   Income Tax Rulings
International and Large Business Directorate                                                        Directorate
International Tax Division                                                                                       Sylvain Grégoire
International Advisory Services Section
                                                                                                                               2016-067366

Upstream loans – allocation of repayments

This is in reply to your correspondence of October 26, 2016 in which you request our views on a particular aspect of the foreign affiliate upstream loan rules (the “Upstream Loan Rules”) contained in subsections 90(6) to (15).

All statutory references herein are to the Income Tax Act (the “Act”).

Issue

You would like our views as to whether repayments should be applied using a “first in, first out” (“FIFO”) method in a context where multiple draws have been made under a single credit facility and those draws straddle the coming-into-force date of the Upstream Loan Rules.

For illustrative purposes, we will use the following assumed facts:

1.    A corporation resident in Canada (Canco) owns all the issued and outstanding shares of a non-resident corporation (FA).

2.    Canco and FA enter into a credit agreement which provides Canco with a revolving credit facility (the “Agreement”) that allows Canco to borrow up to $100,000,000 from FA.

3.    Prior to August 19, 2011, Canco borrows $50,000,000 (“Advance A”) under the Agreement.

4.    In October 2012, Canco borrows an additional $50,000,000 (“Advance B”) such that the total amount outstanding under the Agreement amounts to $100,000,000 at that time.

In September 2014, Canco repays $50,000,000 (the “Repayment”) leaving a balance of $50,000,000 under the Agreement.

5.    No additional advances or repayments are made.

6.    No deduction is available under subsection 90(9).

7.    Neither Canco nor FA makes any specific designation in respect of the Repayment.

Our comments

Pursuant to paragraph 90(8)(a), subsection 90(6) will not apply where the loan or indebtedness is repaid within two years of the day it was made or arose, provided the repayment is not made as part of a series of loans or other transactions and repayments.

Pursuant to subsection 66(3) of the Technical Tax Amendments Act, 2012, subsections 90(6) to (15) apply in respect of loans received and indebtedness incurred after August 19, 2011. However, any portion of any particular loan received or indebtedness incurred on or before August 19, 2011 that remains outstanding on August 19, 2014 is deemed to be a separate loan or indebtedness that was received or incurred on August 20, 2014. As a result, Advance A must be repaid by August 19, 2016, in order to avoid an income inclusion under subsection 90(6), whereas Advance B must be repaid by October 2014.

Where a particular form of indebtedness is accounted for as a single balance representing various advances and repayments, such as seems to be the case here, it is our view that the FIFO method should apply to repayments, unless a specific designation is made to the contrary. However, in the context of the transitional Upstream Loan Rule, such methodology would apply based on the dates of the actual loan advances and without regard to the fact that certain portions of pre-August 19, 2011 loans might be deemed to be made on August 20, 2014.

As such, in the scenario illustrated, because no specific designation has been made in respect of the Repayment, it is our view that the Repayment should be applied to Advance A even though, for purposes of the Upstream Loan Rules, that loan is deemed to occur after Advance B.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca.

We trust these comments will be of assistance, and thank you for your enquiry.

Dave Beaulne, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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