2021-0887521C6 IFA2021 Q7: Section 247, FAPI & Subsection 80.4(2)

Principal Issues: 1) Whether subsection 247(2) applies in computing a foreign affiliate's FAPI in the context of a transaction where a non-interest-bearing loan is made by the foreign affiliate to another non-resident person. 2) If subsection 247(2) applies in the described situation, whether subsection 80.4(2) would also apply to deem a benefit to arise.

Position: 1) Yes. 2) Yes.

Reasons: 1) The CRA's long-standing view that subsection 247(2) could, in general, apply to a transaction between a foreign affiliate and another non-resident person in computing the foreign affiliate's FAPI in respect of a taxpayer. 2) There is no conflict between the two provisions and they both apply concurrently in the present case.

Author: Liu, Vicky
Section: 15(1), 15(9), 80.4(2), 91(1), 212(2), 215(1), 214(3)(a), 247(2), Regulation 4301(c)

2021 International Fiscal Association Conference

CRA Roundtable

Question 7 - Section 247, FAPI and Subsection 80.4(2)

Assume the following fact pattern: Foreign Parent (“FP”) owns 100% of the shares of a Canadian Corporation (“CanCo”) which in turn owns 100% of the shares of Foreign Sub (“FS”), which is a foreign affiliate of CanCo. FP owns 100% of the shares of another foreign corporation called Foreign BorrowerCo (“FB”). FB is not a foreign affiliate of CanCo. FS uses its own funds generated from its operations to make a non-interest bearing loan to FB which is repaid within 2 years such that the upstream loan rules in subsection 90(6) do not apply.

A similar fact pattern was considered in CRA document #2015-0622751I7 (August 16, 2017). That file involved a “sandwich structure” where a foreign parent holds Canadian companies (“Cancos”) which in turn hold foreign affiliates. A foreign affiliate made a non-interest bearing loan to another foreign subsidiary of the foreign parent that was not a foreign affiliate of the Cancos (essentially an upstream loan). The upstream loan rules in subsection 90(6) would have applied except that the loan was repaid within 2 years. The CRA opined that subsection 80.4(2) would apply to deem a benefit to arise, and Part XIII withholding tax would be levied on the deemed dividend. The CRA also opined that the tax owing was the foreign borrower's and that the obligation to withhold and remit the tax was that of the foreign lender. Transfer pricing was not discussed in this particular CRA document.

The CRA has also expressed in CRA document #2017-0691191C6 (April 26, 2017) the view that the transfer pricing rules could apply for the purposes of the calculation of foreign accrual property income (“FAPI”) where a foreign affiliate enters into a transaction with another non-resident person.

Based on the above summary and the fact pattern referred to in the first paragraph:

(i) Would the transfer pricing rules in section 247 operate to deem interest income to FS which is picked up in CanCo's income as FAPI?

(ii) If the answer to (i) is “yes”, can the CRA comment on whether subsection 80.4(2) would apply to deem a benefit to arise (that is, in turn, subject to Part XIII withholding tax) since no interest is actually paid?

CRA Response

(i)     As expressed in Question 2 of the CRA’s Roundtable held at the 2017 International Fiscal Association Conference, it is the CRA's long-standing view that subsection 247(2) could, in general, apply to a transaction between a foreign affiliate and another non-resident person in computing the foreign affiliate's FAPI in respect of a taxpayer.

In the present case, we are of the view that subsection 247(2) would apply to adjust the interest income of FS on the loan between FS and FB to reflect an arm’s length rate of interest. The adjusted interest income to FS would be included in its FAPI and further included in CanCo’s income, pursuant to subsection 91(1).

(ii)     This answer builds on the technical interpretation provided by the CRA in document #2015-0622751I7 that was issued in 2017.

The CRA is of the view that section 247 can apply in conjunction with other provisions of the Act. The fact that subsection 247(2) could apply to adjust the interest income of FS on the loan between FS and FB and result in an income adjustment to FS for the purposes of its FAPI computation does not preclude subsection 80.4(2) from applying in respect of FB.

In the present case, subsection 80.4(2) would apply to deem FB to have received a benefit computed based on the prescribed rate under paragraph 4301(c) of the Income Tax Regulations. Subsection 15(9) deems the subsection 80.4(2) benefit to be a shareholder benefit under subsection 15(1). That shareholder benefit is then deemed to have been paid to FB as a dividend under paragraph 214(3)(a), which is subject to withholding tax under subsection 212(2). FS would be required to withhold and remit the withholding tax under subsection 215(1).

The CRA sees no conflict between subsections 80.4(2) and 247(2) and is of the view that these provisions may apply concurrently in the present case. Also, it is to be noted that subsection 247(12) is not applicable in respect of the “primary adjustments” made in the present circumstances in application of subsection 247(2).

Vicky Liu / Nicolas Bilodeau
2021-088752
May 5, 2021

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