Principal Issues: Can the exception in par. 90(8)(a) apply to an upstream loan which is repaid and then indirectly converted to a new loan which is subject to a PLOI election?
Position: Yes.
Reasons: The repayment would not be considered to be part of a series of loans and repayments in the scenario presented.
2016 International Fiscal Association Conference
CRA Roundtable
Question 4 – Upstream Loans Converted to PLOIs
Assume the following hypothetical facts:
a) NRco, a non-resident corporation, owns all the shares of Canco, a taxable Canadian corporation.
b) Canco generates $10M of excess cash and would like to provide that cash to NRco by means other than a direct distribution.
c) In 2010, Canco incorporates FA, a non-resident wholly owned corporation, and transfers the $10M of cash to FA in exchange for additional shares of FA.
d) FA immediately uses the cash to make a loan to NRco at an arm’s length rate of interest.
e) In April 2016, NRco repays the loan to FA and FA immediately distributes the cash to Canco as a dividend out of pre-acquisition surplus.
f) Canco immediately lends the cash to NRco and files a valid PLOI election under subsection 15(2.11).
The intent of these transactions is to terminate the so-called “second-tier loan” structure before the August 19, 2016 deadline and thus avoid the application of the upstream loan rules in subsections 90(6) to (15) of the Act.
Would the CRA view these transactions as constituting a “series of loans or other transactions and repayments” within the meaning of paragraph 90(8)(a) such that the exception in that paragraph would not apply, resulting in an inclusion under subsection 90(6) of $10M?
CRA Response
The upstream loan rules in subsections 90(6) to (15) are anti-avoidance rules aimed at countering synthetic dividend distributions by foreign affiliates. They generally apply to loans made by foreign affiliates to their Canadian parent, or certain other related parties, that remain outstanding for more than two years.
As set out in paragraph 90(8)(a), repayments of such loans within that two year period that are made as part of a “series of loans or other transactions and repayments” (the “Series Test”) are disallowed. In other words, where the Series Test applies, the loan will be considered to remain outstanding.
These rules generally apply to loans made after August 19, 2011. However, there is a transitional rule that provides that any loans made on or before August 19, 2011 are deemed to be separate loans made on August 20, 2014, to the extent of the amounts thereof that remain outstanding on August 19, 2014.
The structure contemplated above is subject to the transitional rule. Thus, for the purposes of the upstream loan rules, the loan is deemed to be made on August 20, 2014 and the taxpayer has two years from that date to ensure it is repaid, having regard to the Series Test. The question that arises here is whether the loan made by Canco to NRco would make it such that the repayment by NRco of the loan it received from FA would be caught by the Series Test.
Based on a unified textual, contextual and purposive analysis of the Series Test, the transitional rule, the upstream loans regime more generally and the PLOI rules, the CRA is of the view that, in the hypothetical situation described above, the repayment by NRco of the loan from FA would not be caught by the Series Test such that the repayment would qualify under paragraph 90(8)(a) and no subsection 90(6) inclusion would occur.
Yves Grondin
Dave Beaulne
2016-064215
May 26, 2016