Principal Issues: Whether the new back-to-back loan rules provided in subsection 15(2.17) would apply to the situation presented.
Position: Probably yes.
Reasons: Conditions provided in subsection 15(2.16) would be met.
XXXXXXXXXX 2017-069069 M. Séguin October 31, 2017
Dear Sir,
Subject: Subsection 15(2.16)
This is in response to your letter of February 22, 2017, in which you requested our comments with respect to subsection 15(2.16) and following.
Unless otherwise indicated, any reference to any section of the Act or any of its provisions in this document is to a section of the Income Tax Act (the "Act") or to one of its provisions.
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Hypothetical scenario
The relevant facts you presented are as follows:
1. Mr. X and Ms. X were spouses and resided in Canada.
2. LP was a limited partnership established under the Civil Code of Quebec whose limited partners were Mr. X and Ms. X.
3. Each of the Limited Partners held 49.995% of the units.
4. LP carried on a business in the United States.
5. Corporation A was the general partner of LP and held 0.01% of the LP Units.
6. Corporation A was a corporation resident in Canada all of whose shares of capital stock were held by Corporation B, a corporation resident in Canada.
7. Corporation B was a corporation all the shares of the capital stock of which were held equally by Mr. X and Ms. X.
8. As part of its business, LP needed to obtain $3 million to acquire a property.
9. Under LP’s business model, it was necessary for Ms. X to invest the required funds in LP.
10. To make this investment, Ms. X borrowed money from a Canadian bank ("Bank")
11. Bank was willing to make a loan to Ms. X provided that Corporation B acquired a term deposit in an amount equal to that of the loan and that the term deposit was pledged as security for the loan made by Bank to Ms. X.
Your questions
You wish to know whether the back-to-back loan rules provided in subsection 15(2.16) and following apply to the scenario you presented. In addition, you asked whether a term deposit used as security is property within the definition of "specified right".
Our Comments
Where the shareholder back-to-back loan rules apply to a debt of a shareholder of a corporation resident in Canada, the shareholder is deemed to be indebted directly to the corporation.
More specifically, subsection 15(2.17) applies at any time if the conditions in subsection 15(2.16) are satisfied:
- by virtue of paragraph 15(2.16)(a), at that time, a person (in the scenario, Ms. X) or partnership has an amount outstanding as debt ("shareholder debt" - in the scenario, Ms. X's loan) to a person ("immediate funder" - in the scenario, Bank);
- by virtue of paragraph 15(2.16)(b), subsection 15(2) would not, in the absence of subsections 15(2.16) and (2.17), apply to the shareholder debt; and
- by virtue of subparagraphs 15(2.16)(c) (i) and (ii), at that time, a funder (in the scenario - Bank), in respect of a particular funding arrangement:
(i) has an amount outstanding as or on account of a debt or other obligation to pay an amount (in the scenario - the term deposit) to a person (in the scenario - Corporation B) or partnership that meets either of the following conditions:
(A) recourse in respect of the debt or other obligation is limited in whole or in part, either immediately or in the future and either absolutely or contingently, to a funding arrangement, or
(B) it can reasonably be concluded that all or a portion of the particular funding arrangement was entered into or was permitted to remain outstanding because
(I) all or a portion of the debt or other obligation was entered into or was permitted to remain outstanding, or
(II) the funder anticipated that all or a portion of the debt or other obligation would become owing or remain outstanding, or
(ii) has a specified right in respect of a particular property that was granted directly or indirectly by a person or partnership and
(A) the existence of the specified right is required under the terms and conditions of the particular funding arrangement, or
(B) it can reasonably be concluded that all or a portion of the particular funding arrangement was entered into, or was permitted to remain in effect, because
(I) the specified right was granted, or
(II) the funder anticipated that the specified right would be granted;
- By virtue of paragraph 15(2.16)(d), at that time, one or more funders (in the scenario - Corporation B) is an ultimate funder.
We are of the view that in the scenario presented, the rules in subsection 15(2.17) would apply given that the conditions in paragraph 15(2.16) would be satisfied. Respecting paragraph 15(2.16)(c), it appears to us that, based on the facts in the hypothetical scenario, the condition in clause 15(2.16)(c)(i)(B) would be satisfied.
Consequently, a determination as to whether or not there was a specified right for the purposes of subparagraph 15(2.16)(c)(ii) would not be necessary.
However, in a situation where a determination as to whether there was a specified right for purposes of subparagraph 15(2.16)(c)(ii) would be necessary, this would be a question of fact requiring a review of the legal documentation. However, depending on the circumstances and the legal documentation, it appears possible to us that a term deposit given as a security could represent property that comes within the definition of specified right for the purposes of subparagraph 15(2.16)(c)(ii).
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch