Principal Issues: Asked for an example of an offshore financing structure caught by new subsection 17(2) that would not have been Gaarable before the entry into force of new subsection 17(2).
Position: Basic example provided.
Reasons: Question of fact.
ROUNDTABLE 2000 - CGA (QUEBEC)
Question 6
Financing structure referred to in new subsection 17(2)
The technical notes published on March 10, 1999, in relation to the new subsection 17(2) indicate that the more restrictive rules of the proposed subsection 17(2) will only be applied prospectively, thus allowing time for taxpayers to reorganize structures previously not coming within section 245.
Could the Agency provide an example of a financing structure that would come within the provisions of the new subsection 17(2) but would have been considered neither offensive nor abusive prior to that time?
Reply of the Income Tax Rulings Directorate
We believe that the following situation could be an example of a financing structure covered by the new subsection 17(2), to which the former paragraph 17(1) and paragraph 245(2) did not apply.
- Canco is a corporation wholly owned by Canadian residents.
- Foreign Corporation 1 (“FC 1”) and Foreign Corporation 2 (“FC 2”) are non-residents. FC 2 is resident in a “designated treaty country” as defined in paragraph 5907(11) of the Income Tax Regulations.
- Canco is the sole shareholder of FC 1. The latter is therefore a “controlled foreign affiliate” of Canco within the meaning of that term in subsection 17(15). Canco and FC 1 are “related persons” pursuant to subparagraph 251(2)(b)(i).
- FC 2 is a “foreign affiliate” of Canco within the meaning of that term in subsection 95(1). However, FC 2 is not a “controlled foreign affiliate” of Canco within the meaning of that term in subsections 17(13) and 17(15).
- Canco acquired treasury shares of FC 1. The proceeds from the issue of shares were used to make an interest-free loan to FC 2.
- FC 2 used the borrowed money in an “active business” as defined in subsection 95(1). The loan has been outstanding for more than one year.
Former subsection 17(1) was not applicable in the situation described above because the corporation resident in Canada did not lend money to a non-resident. Furthermore, subsection 245(2) would not generally have been applicable in such a situation.
On the other hand, the new anti-avoidance rule provided for in subsection 17(2) could apply in such a situation.
In particular, the subscription for treasury shares of FC 1 by Canco constitutes a transfer of property for the purposes of the application of subsection 17(2) and is not an “exempt loan or transfer” of property within the meaning of subsection 17(15) since, among other things, at the time of the transfer, Canco was related to FC 1.
Furthermore, the two exceptions provided for in subsection 17(3) with respect to the application of subsection 17(2) would not apply in this situation.
On the one hand, the exception provided for in paragraph 17(3)(a) would not apply since FC 2 is not a “controlled foreign affiliate” of Canco.
On the other hand, the exception provided for in paragraph 17(3)(b) would not apply either, because the terms of the interest-free loan made to FC 2 by FC 1 do not correspond to terms that would have been agreed between persons dealing with each other at arm’s length.
Consequently, FC 2 would be deemed to be indebted for a sum due to Canco equal to its debt to FC 1 by virtue of subsection 17(2).
Agent’s name: Marc LeBlond
File no.: 2000-000823
Date: May 12, 2000
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