2016-0676701E5 Subsection 17(8)

Principal Issues: Whether clause 17(8)(a)(i)(A) applies where a controlled foreign affiliate borrows money from a parent corporation resident in Canada to return capital used for the purpose of earning active business income.

Position: Yes.

Reasons: Change in position.

Author: Eroff, Ina
Section: -

XXXXXXXXXX                                                                                                                               2016-067670
                                                                                                                                                       Ina Eroff, B.C.L./LL.B.
                                                                                                                                                       (416) 973-3049
May 15, 2017

Dear XXXXXXXXXX,

Re: Clause 17(8)(a)(i)(A)

We are replying to your email in which you asked whether our comments made at the 2009 TEI Conference in response to Question 2 (CRA Document No. 2009-0348851C6 (November 30, 2009)) evidence a change to our position on the application of clause 17(8)(a)(i)(A) of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) expressed in CRA Document No. 2000-0060475 (October 23, 2001).

Unless otherwise stated, all references to a statute are to the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Subsection 17(8) provides that subsection 17(1) does not apply to an amount owing to the taxpayer by a controlled foreign affiliate to the extent that it is established that the amount owing has been used by the controlled foreign affiliate for certain eligible purposes. In particular, clause 17(8)(a)(i)(A) applies when the amount owing is used for the purposes of earning income from an active business, as defined in subsection 95(1), of the affiliate.

In CRA Document No. 2000-0060475 we commented that clause 17(8)(a)(i)(A) does not apply to exempt a non-interest bearing loan from a Canadian resident parent corporation to its controlled foreign affiliate from the application of subsection 17(1) where the proceeds of the loan are used by the affiliate to fund a return of capital either by redeeming a certain number of issued shares or by reducing the paid-up capital of issued shares.

During the CRA Roundtable at the 2009 TEI Conference (CRA Document No. 2009-0348851C6) we were asked how the CRA establishes "the extent... that the amount owing" is used for one of the eligible purposes described in paragraph 17(8)(a).  We recommended that the approach described in paragraph 12, et seq. of IT-533 (Interest Deductibility and Related Issues (October 31, 2003)) (now in Income Tax Folio S3-F6-C1, Interest Deductibility) in respect of the “use of borrowed money” should generally be followed when determining the use of funds for purposes of the test in paragraph 17(8)(a).

You have asked us to clarify our view on the indirect use of funds in the context of clause 17(8)(a)(i)(A).

Our comments:

This technical interpretation provides general comments about the provisions of the 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

During the CRA Roundtable at the 2009 TEI Conference we provided general comments on applying the approach described in IT-533 to the determination of the use of funds for purposes of the test in paragraph 17(8)(a). We have now considered your specific question about the application of the exceptions to the direct use test and we agree that the exceptions to the direct use test provided in section 1.45, et seq. of Income Tax Folio S3-F6-C1 can apply to clause 17(8)(a)(i)(A).

This is a change in position regarding the application of subsection 17(8) to a loan or advance of money to a controlled foreign affiliate that the affiliate uses to redeem shares, return capital or pay dividends. The position stated in CRA Document No. 2000-0060475 no longer represents the CRA’s opinion.

We hope this information is of assistance to you.

Yours truly,

Olli Laurikainen, CPA, CA
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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