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) could apply in respect of an amount owing under a loan where neither subsection 17(1) nor subsection 247(7) applies.
Position: Subsection 247(2) could apply in such a case.
Reasons: Neither subsection 247(7) nor the administrative position adopted in paragraphs 21 and 22 of Information Circular 87-2R would apply to exempt the loan from the application of subsection 247(2) in such a case.
XXXXXXXXXX 2003-003389
Éric Allard-Pouliot
February 6, 2004
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Section 17 and subsections 247(2) and (7)
This is in reply to your letter of August 1, 2003, regarding the above-noted subject. More particularly, you have asked us to consider whether subsection 247(2) of the Income Tax Act (the "Act") could apply in the following hypothetical situation:
? a corporation resident in Canada loans an amount to a non-resident wholly-owned subsidiary ("Foreignco");
? Foreignco does not use the loan for the purpose of earning income from an active business; and
? the loan is repaid within a year from the moment it is made.
Subsection 247(2) of the Act is broadly worded and, as stated in paragraph 20 of Information Circular 87-2R (the "Circular"), could be applied to a "wide variety of arrangements", including financial transactions. However, the Act specifically provides for situations, which although falling within the ambit of subsection 247(2) of the Act, are not subjected to this provision. These exclusions from the application of subsection 247(2) of the Act are provided for in subsection 247(7) and proposed subsection 247(7.1) (see the March 11, 2003 Finance Comfort Letter). Whereas proposed subsection 247(7.1) deals with guarantees, and is therefore of no relevance to the situation submitted in your request, subsection 247(7) of the Act applies with respect to loans which are made by a corporation resident of Canada to one of its controlled foreign affiliates where the amount owing under the loan is an amount owing described in paragraph 17(8)(a) or (b).
In the situation described in your request, Foreignco does not use the loan for the purpose of earning income from an active business. Therefore, it follows that the amount owing under such a loan does not fall within the ambit of either paragraph 17(8)(a) or (b) of the Act and, as a result, is not excluded from the application of subsection 247(2) should the conditions of this provision be met. In our view, the March 1999 Technical Notes to subsection 247(7) of the Act (the "Technical Notes") support such a result. After a brief description of the conditions underlying the application of subsection 247(7) of the Act, the Technical Notes goes on to say that "while subsection 247(2) will not apply to the interest payable in such a case, it could still apply to any other term of the transaction." In our view, this statement implicitly confirms that subsection 247(2) of the Act could apply to interest payable in other cases, i.e. where the conditions of subsection 247(7) are not met.
Notwithstanding the foregoing, there are a few situations falling outside the ambit of subsection 247(7) of the Act to which the Canada Customs and Revenue Agency (the "CCRA") would generally not apply subsection 247(2) of the Act to deem interest to be received or receivable under a loan. Thus, in accordance with paragraph 22 of the Circular, in certain circumstances a loan from a foreign affiliate of a corporation resident in Canada will not be subjected to subsection 247(2) of the Act. However, since in the hypothetical situation described in your request the loan would be made by a corporation resident in Canada, this paragraph is of no application.
Paragraph 21 of the Circular also provides that:
"As a general rule, the specific provisions of the Act-relating to loans and other indebtedness to or from non-residents, which are contained in sections 17 and 80.4, subsections 15(2) and 18(4)-would be applied before considering the more general provisions of section 247."
In our view, this comment addresses situations where both subsection 247(2) of the Act and either one of the provisions referred to in this paragraph technically apply. In such cases, paragraph 21 of the Circular provides that the more specific provision should be applied first before considering section 247 of the Act. In this regard, it is worth noting that paragraph 21 of the Circular does not provide for an automatic exemption from the application of subsection 247(2) of the Act in such cases but simply states that the more specific provision should be applied first.
With respect to the hypothetical situation described in your request, since the amount owing under the loan would remain outstanding for less than a year, it follows that subsection 17(1) of the Act would not apply to deem interest to be received or receivable on the loan. Therefore, we are of the view that your situation is not one of those contemplated in paragraph 21 of the Circular.
As a result of the foregoing, we are of the view that subsection 247(2) of the Act could apply to the situation described in your letter. To consider that subsection 247(2) of the Act should never be applied in a situation such as the one described in your request would, in our view, render meaningless the exception to subsection 247(2) provided for in subsection 247(7). In other words, we feel that subsection 247(7) of the Act would have been worded differently if it was meant to exempt from the application of subsection 247(2) not only an amount owing which is described in paragraph 17(8)(a) or (b), but any amount owing to which section 17 of the Act doesn't apply.
The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.
Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
c.c.: Mr. Bruce Allen
Acting Director General
International Tax Directorate
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