A limited partnership (LP) between two resident related corporations (ACo and BCo) made a non-interest bearing loan to FA, which was wholly-owned by ACo. FA used the loan proceeds for the purpose of earning income from an active business, so that there was no imputed income to the partners under s. 17(1) by virtue of ss. 17(4), (8), and (13). However, s. 247(7), which generally avoids the imputation under s. 247(2) of interest on indebtedness that is covered by s. 17(8), is only stated to apply to amounts owing to a resident corporation, and not to a Canadian partnership.
CRA stated that it was “not prepared to take an administrative position to consider that subsection 247(7) would apply in respect of the loan between the FA and LP … .” In this regard, it indicated that:
- Ss. 17 and 247 “each have a distinct and separate role,” so that “the exception from application of one of these sections” does not generally establish “an intention to preclude the application of the other section.”
- Further, “adopting the requested administrative position could potentially facilitate the use of structures using hybrid entities to achieve a tax benefit.”