Principal Issues: Whether or not subsection 247(2) would apply to reduce the cost of a loan made by a corporation resident in Canada to a nonresident wholly-owned subsidiary.
Position: See document.
Reasons: See document.
CLHIA ROUNDTABLE - MAY 2007
Question 10
Subsections 247(2) and (7)
A corporation resident in Canada ("Canco") lends money to a nonresident wholly-owned subsidiary corporation ("Foreignco"). Foreignco uses the money solely for the purpose of earning income from an active business, as defined in the subsection 95(1) of the Act. The loan is repayable on a specified date and is non-interest bearing. In this situation, since the loan is an amount owing described in paragraph 17(8)(a) of the Act, subsection 247(7) would apply with respect to it. Consequently, subsection 247(2) would be precluded from applying "to adjust the amount of interest paid, payable or accruing" on the loan.
Question:
Could you confirm that subsection 247(2) would not reduce the cost of the loan to Canco? For this purpose, the cost of the loan is the amount loaned or advanced.
Agency's Response
Paragraph 21 of Information Circular 87-2R states that section 17 of the Act would be applied before considering section 247. This does not provide for an automatic exemption from the application of subsection 247(2). The CRA has indicated 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 (i.e. the loan is repaid within one year).
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 (as defined for the purpose of section 17) where the amount owing under the loan is an amount owing described in paragraph 17(8)(a) or (b). In the situation described above, assuming the conditions underlying the application of subsection 247(7) are met, subsection 247(2) will not be applied to "adjust the amount of interest paid, payable or accruing in the year" on the amount owing as described in paragraph 17(8)(a).
Subsection 247(7) applies to interest only and not to any other amounts. Consequently, while subsection 247(2) will not apply to the interest in such a case, it could still apply to any other term of the transaction. For example, subsection 247(2) could apply to adjust the amount that is actually owing where the facts of the case support it. For example, the amount owing is the unpaid purchase price of goods sold to the non-resident and the purchase price agreed to between the parties to the sale is not one that persons dealing at arm's length would have agreed to. Thus the response depends on all the facts surrounding the amount loaned or advanced. The Department of Finance's Technical Notes support this position.