2019-0805481I7 Interaction of 17.1(1) & 247(2)

Principal Issues: Whether subsection 247(2) could apply in conjunction with section 17.1 to the same transaction?

Position: Yes.

Reasons: No conflict.

Author: Roulier, Yannick
Section: 15(2), 17.1, 247.

                                                                                            September 6, 2023

Ms. Marian Young                                                                     HEADQUARTERS
Senior Technical Specialist
International Technical Issues Section                                      Income Tax Rulings
International Tax Division                                                          Directorate
International, Large Business and Investigations Branch         Yannick Roulier

                                                                                                   2019-080548

Interaction of Subsection 17.1(1) and 247(2)

This is in reply to your e-mail dated April 18, 2019, requesting our views concerning a request from the London-Windsor Tax Services Office (“TSO”) of the Canada Revenue Agency (“CRA”) with respect to the interpretation of and interaction between subsections 17.1(1) and 247(2) of the Income Tax Act (the “Act”) as they apply to a series of inter-company loans. The initial request was subsequently complemented by information received through e-mails, and in the course of various telephone conversations.

Unless otherwise stated, all references below to statutory provisions are references to provisions of the Act, and the Income Tax Regulations (the “Regulations”).

Background

We understand the relevant facts to be as follows:

1. A corporation resident in a foreign country (“Parent1”) wholly-owns another corporation resident in a second foreign country (“Parent2”), which in turn wholly-owns another corporation resident in a third foreign country (“Parent3”).

2. Parent3 is the sole shareholder of a corporation resident in Canada (“CRIC”), which has a December 31st year end.

3. The period under audit by the TSO is the CRIC’s taxation years 2013 to 2015.

4. During that period, the CRIC concluded seven loans with Parent2, for a total amount of $4.090 billion, which are evidenced by loan agreements the terms and conditions of which include generally the following:

a. the loan agreements are governed by Canadian (Ontario) law;

b. they are unsecured and non-guaranteed loans that have maturity terms of 10 years;

c. the loans bear interest at a floating rate equal to the prescribed rate under subsection 4301(b.1) of the Regulations; and

d. interest is payable not less than annually, or no later than 30 days after the end of the year following the year in which the interest was accrued.

5. A valid joint election under subsection 15(2.11) was timely filed by the CRIC and Parent2 for each of these loans such that they each qualify as a “pertinent loan or indebtedness” for the purposes of subsections 15(2) and 17.1(1).

We refer to the referral memorandum from the TSO attached to Marian Young’s e-mail dated April 18, 2019, for more details in respect of the relevant facts applicable.

Issue

The issue to be considered is whether sections 17.1 and 247 may apply to the same set of facts without being considered as being in conflict, notwithstanding that the arm’s length rate determined in the context of the application of subsection 247(2) for transfer pricing purposes might be higher, lower or equivalent to the rate prescribed by subsection 4301(b.1) of the Regulations. In that respect, it was agreed that we limit our comments only to the interaction of these provisions, to the exclusion of comments in respect of their ordering of application.

Comments

We are of the view that section 247 is applicable in conjunction with section 17.1 if the conditions for the application of both subsections 17.1(1) and 247(2) are met. Subsection 247(2) can apply to debts owing by a non-resident person to a Canadian resident corporation with which the non-resident person does not deal at arm’s length, to which subsection 17.1(1) applies. More specifically, we submit that the principle of statutory interpretation according to which a specific provision in a statute precludes the application of a general provision in that statute, commonly known as the rule of implied exception, does not apply with respect to sections 17.1 and 247 because there is no conflict between those two provisions and they do not interfere with their policy objectives. In short, we are of the view that subsection 247(2), which was broadly worded to embody the arm’s length principle, was meant to apply to all cross-border transactions, arrangements or events, including financial transactions, between non-arm’s length persons or partnerships, unless a specific exclusion applies. This position is similar in principle to the one expressed in Question 1 of the CRA Roundtable held at the Seminar of the Canadian Branch of the International Fiscal Association in Toronto on April 26, 2017 (CRA document no. 2017-0691071C6, April 26, 2017) in respect of the interaction of sections 17 and 247.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’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 latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

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

Yours truly,

Charles Taylor
Acting Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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