Principales Questions: Would the CRA be prepared, on an administrative basis, to consider that subsection 247(7) is applicable to amounts owing by a foreign affiliate to a partnership, every member of which is a corporation resident in Canada, where all of the other conditions in subsection 247(7) are otherwise met?
Position Adoptée: No.
Raisons: As a baseline for adopting an administrative position, the CRA must be satisfied that doing so would align with the policy underlying the particular provision. It is not clear that this is the case in respect of this request. Furthermore, it would not be appropriate to take a position that disregards Parliament’s decision to limit the application of subsection 247(7) to indebtedness owed to a corporation. In this regard, we note that the partnership look through rule in subsection 17(4) was enacted (in 1999) concurrent with the introduction of subsection 17(8) and the amendment to subsection 247(7) to refer to subsection 17(8).
2021 International Fiscal Association Conference
CRA Roundtable
Question 5 – Applicability of subsection 247(7)
Consider a situation where two corporations (ACo and BCo), each of which is resident in Canada, are related within the meaning of subsection 251(2). Assume that ACo owns 100% of the outstanding shares of a non-resident corporation (“FA”), and that ACo and BCo are the only members of a limited partnership (“LP”). LP has made a non-interest bearing loan to FA, the proceeds of which are used, at all times while the loan is outstanding, for the purpose of earning income from an active business. By virtue of subsections 17(4), (8), and (13), subsection 17(1) does not apply to include an imputed amount of interest in the income of ACo or BCo.
Subsection 247(7) provides that, where certain conditions are met, subsection 247(2) does not apply to adjust the amount of interest paid, payable or accruing in the year on certain amounts owing that are described in subsection 17(8). In the situation described, all of the conditions in subsection 247(7) should be met, with the exception that the loan in question is not an amount owing to a corporation resident in Canada for purposes of section 247, notwithstanding that it is deemed to be an amount owing to the members of LP for purposes of section 17.
Would the CRA be prepared, on an administrative basis, to consider that subsection 247(7) is applicable to amounts owing by a foreign affiliate to a partnership, every member of which is a corporation resident in Canada, where all of the other conditions in subsection 247(7) are otherwise met?
CRA Response
The CRA is 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 described in the question.
The responsibility for the introduction and amendment of Canadian income tax legislation rests with the Parliament of Canada. The CRA's mandate is to interpret and administer the legislation that Parliament enacts. These separate roles must be respected and the CRA exercises caution when considering whether it is appropriate to take an administrative position. As a baseline for adopting an administrative position, the CRA must be satisfied that doing so would align with the policy underlying the particular provision. It is not clear that this is the case in respect of this request.
As indicated in the 2017 International Fiscal Association Conference CRA roundtable (2017-0691071C6), the CRA is of the view that sections 17 and 247 each have a distinct and separate role within the Act and the exception from application of one of these sections in respect of a transaction should not, in the absence of a specific rule, be assumed to reflect an intention to preclude the application of the other section. Accordingly, it would not be appropriate to take a position that disregards Parliament’s decision to limit the application of subsection 247(7) to indebtedness owed to a corporation. In this regard, we note that the partnership look through rule in subsection 17(4) was enacted (in 1999) concurrent with the introduction of subsection 17(8) and the amendment to subsection 247(7) to refer to subsection 17(8).
Finally, in our view, adopting the requested administrative position could potentially facilitate the use of structures using hybrid entities to achieve a tax benefit. The Canadian government’s concern with such structures, both on its own account and through its participation as a member of the OECD, is well documented. As a general rule, taxpayers should expect that administrative relief requests that appear to potentially facilitate such planning will be denied by the CRA.
Angelina Argento/Marie Claude Routhier
2021-088767
May 5, 2021
Response prepared in collaboration with:
Michael Jennings, Director International Tax Division
International, Large Business and Investigations Branch