30 August 2001 External T.I. 2001-0081095 - TRANSFER OF SHAREHOLDER INDEBTEDNESS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The application of subsection 15(2) for a non-resident shareholder of a Canadian corporation to indebtedness, otherwise subject to the application of 15(2) if not repaid within one year after the end of the corporation's taxation year, where the indebtedness is transferred from the Canadian corporation to its wholly owned non-resident subsidiary prior to one year after the end of the Canadian corporation's taxation year.

(1) Does the subsection 15(2.2) exclusion for indebtedness between two non-residents apply?

(2) Does the subsection 15(2.6) exclusion for a repayment of indebtedness within one year after the taxation year of the lender apply?

(3) Would GAAR apply?

Position:

(1) No.

(2) No.

(3) Yes.

Reasons:

Subsection 15(2), (2.2), (2.6) and section 245.

XXXXXXXXXX 		2001-008109
		Randy Hewlett, B.Comm.
August 30, 2001

Dear XXXXXXXXXX:

Re: Transfer of Indebtedness - Repayment For Purposes of Subsection 15(2) of the Income Tax Act (the Act)?

We are writing in response to your letter dated April 20, 2001, wherein you requested our opinion on the application of subsection 15(2) of Act. In the situation you describe, a non-resident corporate shareholder of a Canadian corporation has become indebted to the corporation. You indicate that the amount is "not a series of loans or other transactions and repayments," and would be subject to subsection 15(2) of the Act, and consequently paragraph 214(3)(a), if it were not repaid within one year after the end of the corporation's taxation year.

You inquire whether the application of subsection 15(2) of the Act would differ where the Canadian corporation transfers the shareholder indebtedness to its wholly owned foreign subsidiary prior to one year after the end of its taxation year. In your view the indebtedness is no longer between the Canadian parent and non-resident shareholder, but between two non-residents; subsection 15(2.2) of the Act indicates that indebtedness between two non-residents is not subject to the application of subsection 15(2). As well, you believe that, since the indebtedness is repaid prior to one year after the end of the Canadian corporation's taxation year, the exclusion to the application of subsection 15(2) provided for in subsection 15(2.6) is met.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

The purpose of subsection 15(2) of the Act is to include in a shareholder's income amounts received from a corporation in the guise of loans or other indebtedness, with specific exceptions provided under the Act. It is our view that subsection 15(2) of the Act would apply to the transactions above. Subsection 15(2.2) of the Act would not preclude the application of subsection 15(2) as the debt did not arise between non-residents, nor would subsection 15(2.6) preclude its application by considering the transfer a repayment. In addition, it should be noted that section 17 of the Act could apply to the transfer of the loan to the foreign subsidiary. Furthermore, where transactions such as the one you describe are entered into to avoid the tax consequences inherent in the application of subsection 15(2) of the Act, the General Anti-Avoidance Rules in section 245 may be used to ensure that subsection 15(2), and consequently paragraph 214(3)(a), will apply.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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