| 24(1) | 901809 |
| G. Arsenault | |
| (613) 957-2126 |
19(1)
October 1, 1990
Dear Sirs:
This is in reply to your letter dated August 1, 1990 whereby you made a supplemental inquiry concerning our letter to your firm dated April 12, 1988 in reply to your firm's letter to us dated December 23, 1987 in respect of the settlement of a loan without payment in the following hypothetical situation.
1. Canco is wholly-owned subsidiary of Parent which is in turn owned by U.K. Co. Both Parent and U.K. are corporations resident in the United Kingdom.
2. In Year 1 Canco makes a loan to U.K. Co. The borrowed funds are not used by U.K. Co. in connection with any business carried on by it in Canada.
3. The loan is not repaid by the end of Year 2 with the result that subsection 15(2) and paragraph 214(3)(a) apply to deem the amount of the loan to be a dividend paid by Canco to U.K. Co. in year 1. The deemed dividend is subject to a 10% withholding tax pursuant to the provisions of the Canada-U.K. Tax Convention.
4. In Year 4 Canco agrees to waive its right to repayment of the loan. U.K. Co. is fully capable of repaying the loan. The waiver is designed to avoid Canadian withholding tax being applied for a second time on a repayment of the loan and a subsequent distribution of the proceeds to Parent (as a dividend or as a deemed dividend on the winding up of Canco).
By our letter to you, firm dated April 12, 1988 we advised that it was our view that in the above situation where the loan is settled or extinguished without any payment to Canco, such cancellation of the loan would not result in the application of subsection 15(1).
By your letter of August 1, 1990 you request our comments as to whether the non-application of subsection 15(1) would only be in respect of the portion of the loan that had been previously subject to subsection 15(2) and paragraph 214(3)(a) or whether our comments apply to the entire amount of the loan that is settled or extinguished without payment. We are uncertain as to whether we understand your further inquiry as in the above hypothetical fact situation the entire loan was stated to be subject to subsection 15(2) and we are thus unable to respond specifically to your inquiry. We can however advise that the reason we were of the view that subsection 15(1) would not be applied is that subsection 15(2) had already been applied to the entire loan and it was (and is) the Department's position that U.K. Co. should not be taxed twice under paragraph 214(3)(a) in respect of the same amount.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch