2021-0911881C6 2021 CTF - Q8 - ss 15(2) and FA rules

Principal Issues: Whether subsection 15(2) applies to a loan between a FA of a CanParent and a partnership, where all the members of the partnership are FAs of the CanParent.

Position: This question was sent to the Department of Finance for their consideration.

Reasons: It involves a policy concern.

Author: Yan, Cindy Xiao Xian
Section: 15(2), 15(2.1), 15(2.2), 93.1(4), 95(2)(a)(ii)(D)

2021 CTF Annual Conference
CRA Roundtable

Question 8: Loan from a FA to a Partnership held by two FAs

Assume CanParent has a number of wholly owned foreign affiliates (“FA”s), including FA1, FA2 and FA3. FA1 and FA2 are the sole members of a partnership (“P”).   P borrows under an interest-bearing loan from FA3 to buy all of the issued shares of FA4 (the shares of FA4 are excluded property). Subsection 93.1(4) deems P to be a non-resident corporation for the purpose of applying clause 95(2)(a)(ii)(D). As a result, for the purposes of subdivision i of the Act, the interest paid by P to FA3 will be included in computing the income or loss from an active business of FA3. Technically, it seems possible that subsection 15(2) could apply as it is not clear that the exceptions in subsection 15(2.1) or 15(2.2) are met. However, this would appear to undermine the purpose of the foreign affiliate rules and subsection 93.1(4). Can CRA comment on whether it believes subsection 15(2) would apply in this situation?

CRA Response

Policy concerns regarding provisions of the Income Tax Act, such as the ones expressed in this question, should be brought to the attention of the Department of Finance. We have informed the Department of Finance about these policy concerns.

Cindy Yan/Yves Grondin
2021-091188
November 25, 2021

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2022

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2022