2017-0691071C6 IFA 2017 Q.1: Interaction between s17 and s247

Principal Issues: 1) Does subsection 247(2) apply where a non-interest-bearing loan made by a corporation resident in Canada to its wholly owned foreign affiliate remains outstanding for more than one year and the loan does not qualify for the exception in subsection 17(8)? 2) What if the loan is outstanding for less than one year and would have qualified for the 17(8) exception?

Position: 1) Yes. 2) No.

Reasons: Textual, contextual and purposive interpretation of the Act, based primarily on subsection 247(7).

Author: Larochelle, Sophie
Section: 17; 247

2017 International Fiscal Association Conference
CRA Roundtable

Question 1 – Interaction between subsections 17(1) and 247(2)

Under subsection 17(1) income may, in certain circumstances, be imputed to a corporation resident in Canada in respect of an amount owing to it by a non-resident person, based on a prescribed rate. Under subsection 247(2), an amount in respect of a transaction entered into with a non-arm’s length non-resident may be adjusted to reflect arm’s length terms and conditions.
Where a corporation resident in Canada (“Canco”) makes a non-interest-bearing loan to its wholly owned non-resident subsidiary, could the CRA give us its views as to the potential application of subsection 17(1) and/or subsection 247(2) in the following two scenarios:

*     the loan remains outstanding for more than one year and does not qualify for the exception in subsection 17(8); and

*     the loan remains outstanding for one year or less and it would, if it had been outstanding for more than one year, have qualified for the exception in subsection 17(8)?

CRA Response

These questions build on a technical interpretation (2003-003389) issued by the CRA in 2004, which remains valid today. In that technical interpretation, the subject loan was assumed to be outstanding for less than one year and to not otherwise fit the conditions of subsection 17(8). In that context, it was concluded that subsection 247(2) could apply to adjust the interest on the loan to reflect an arm’s length rate.

Scenario 1

The CRA is generally of the view that subsection 247(2) can apply in conjunction with other provisions of the Act. Thus, once the conditions of application of subsection 247(2) are met and unless a specific exception applies, any amounts that, but for sections 247 and 245, would be determined for the purposes of the Act in respect of the taxpayer should be adjusted to the quantum or nature of the amounts that would have been determined if the parties had transacted at arm’s length.

In this scenario, the specific exception contained in subsection 247(7) would not be applicable, as the conditions of subsection 17(8) are assumed not to be met. However, the fact that subsection 17(1) could apply to impute an amount of interest does not preclude subsection 247(2) from applying, if all of its conditions are met.

We find this conclusion to be consistent with the context created by subsection 247(7). If Parliament had intended for section 17 to be a complete code for loans to non-residents, there would have been no need to enact subsection 247(7). Thus, given that the particular loan described above is not of the type contemplated by subsection 247(7) and assuming that all of subsection 247(2)’s conditions are met, it is the CRA’s view that subsection 247(2) would apply to ensure that the full arm’s length amount of interest is included in Canco’s income.

Scenario 2

In this scenario, although the loan is not outstanding for more than one year and is, thus, excluded from the ambit of subsection 17(1), the loan is of the type contemplated by subsection 247(7). Therefore, notwithstanding that the exception in subsection 17(8) could not have application to this loan, the CRA is of the view that subsection 247(2) would not apply. 

Sophie Larochelle
Dave Beaulne
2017-069107
April 26, 2017

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