A non-resident trust (the “Trust”) took the position that its shares of various private non-resident corporations (“NRCos”) were not taxable Canadian property (“TCP”), so that it was deemed under s. 94(3)(c) to have acquired its NRCo shares at a cost equal to their fair market value (“FMV”). The only assets of the NRCos, other than any intercompany receivables, were shares in private operating corporations resident in Canada (“Opcos”). The Opcos held timber resource properties, Canadian real property, other properties not listed in the definition of TCP and, in some cases, shares of lower tier Opcos.
After referencing its established position that the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the FMV of the share of a corporation was derived directly or indirectly from relevant Canadian properties (“RCP”), such as real property situated in Canada and that “the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from RCP for the purpose of applying the gross asset value method to the shares of the NRCos in order to determine whether more than 50% of the FMV of the share of an NRCo was derived directly or indirectly from one, or any combination of, RCP,” the Rulings Directorate stated:
[A]ny intercompany receivable balance pertaining to a loan made downstream is not…a distinct asset of the particular parent corporation but, rather, its value increases the relevant FMV of its asset that is shares of a particular wholly-owned subsidiary. …
[I]ncluding the value of an intercompany receivable balance pertaining to a loan made upstream as a distinct asset when determining the FMV of the wholly-owned lending subsidiary’s assets would result in the double counting… because when carrying out the gross asset value test for the parent corporation the value of the related intercompany payable balance is…ignored while the funds the parent received from the upstream loan would be included as a distinct asset of the parent… . Therefore…when applying the proportionate value method to a particular subsidiary corporation, the value of an intercompany receivable balance pertaining to a loan made upstream is not…a distinct asset of the particular subsidiary corporation but, rather, its value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary.
…To the extent a loan made to a sister corporation is similar in nature to a loan made downstream (e.g., the loan is part of a back-to-back loan because the funds are on-loaned by the sister corporation to a subsidiary of the particular lending corporation), the intercompany receivable balance pertaining to the loan made to the sister corporation is not.. a distinct asset of the particular lending corporation but, rather, its value increases the relevant FMV of its asset that is shares of its subsidiary.
Whereas, if a loan made to a sister corporation is not similar in nature to a loan made downstream and the shares of the particular lending corporation would not be TCP had it not made the loan (e.g., if it had kept its internally generated excess funds in a bank account), generally, the value of the intercompany receivable balance should be included as a distinct asset when determining the FMV of the particular lending corporation’s assets.