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.
Principal Issues: Whether subsection 247(2) would apply to reduce the cost of a non-interest-bearing loan made by a Canadian corporation to its controlled foreign affiliate.
Position: Nothing in the fact pattern indicates that subsection 247(2) would apply.
Reasons: Application of subsection 247(2) depends on the facts of each case.
XXXXXXXXXX 2006-019579
D. Zhang
(613) 957-2104
January 18, 2008
Dear XXXXXXXXXX :
Re: Application of Subsection 247(2)
We are writing in reply to your letter of July 11, 2006 in which you requested our comments on whether subsection 247(2) of the Income Tax Act (the "Act") would apply to adjust the cost of a loan in the hypothetical situation described below:
- A corporation resident in Canada ("Canco") makes a loan to a non-resident wholly-owned subsidiary corporation ("Foreignco");
- Foreignco uses the proceeds of the loan solely for the purpose of earning income from an active business, as defined in subsection 95(1) of the Act;
- The loan is repayable on a specified date and is non-interest bearing.
You indicated in your letter that, in this situation, since the loan is an amount owing described in paragraph 17(8)(a) of the Act, subsection 247(7) would apply. Consequently, subsection 247(2) would not apply "to adjust the amount of interest paid, payable or accruing" on the loan. You would like to know whether subsection 247(2) could still be applied to reduce the cost to Canco of the loan. You indicated that, for the purposes of your question, the cost of the loan is the amount loaned or advanced to Foreignco. We apologize for the delay in our reply.
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 submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
Subsection 247(2) of the Act applies to a transaction or a series of transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length. Where the terms or conditions of a transaction or a series of transactions differ from those that would have been made between persons dealing at arm's length, subsection 247(2) may apply to adjust an amount determined under the Act in respect of the taxpayer.
Subsection 247(7) of the Act applies to a loan made by a corporation resident in Canada to a non-resident person that is a controlled foreign affiliate of the corporation (for the purpose of section 17) throughout the period during which the amount under the loan is owing and it is established that the amount owing is described in paragraph 17(8)(a) or (b). Where the conditions underlying the application of subsection 247(7) are met, subsection 247(2) would not apply to adjust the amount of interest paid, payable or accruing in the year on the loan. However, subsection 247(2) could apply to adjust the cost of the loan if the facts of the case support such an adjustment. Although subsection 247(2) may apply to adjust the cost of a loan from a Canadian corporation to a controlled foreign affiliate of the corporation, there is nothing in the hypothetical fact pattern described in your letter that would indicate that subsection 247(2) would apply to the cost of the Canco loan.
We trust that these comments are of assistance.
Yours truly,
Daryl Boychuk
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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