| 19(1) | File No. 5-9009 |
| O. Laurikainen | |
| (613) 957-2125 |
March 26, 1990
Dear Sirs:
Re: Subsection 17(3) of the Income Tax Act (the "Act")
This is in response to your letter of October 31, 1989. You have enquired whether subsection 17(3) of the Act would exempt from the application of subsection 17(1) of the Act, an interest-free loan made by a Canadian company ("Canco") to its second-tier foreign affiliate ("F/A Opco"). While you agree that for purposes of the definition of "subsidiary-controlled corporation" in subsection 248(1) of the Act, the shares of F/A Opco "belong" to Canco's first-tier foreign affiliate ("F/A Holdco"), you feel that they would also "belong" to Canco.
We cannot agree with your position. In our view the word "belongs" connotes ownership. Since in this case the shares of F/A Opco are legally owned by F/A Holdco, they would not belong to Canco and F/A Opco would for that reason not be a "subsidiary-controlled corporation" of Canco for the purposes of the definition in subsection 248(1) of the Act. Therefore, the exemption in subsection 17(3) of the Act would not exempt the loan made by Canco to F/A Opco. This view of the meaning of the word "belongs" was accepted by the Trial Judge in Massey-Ferguson Ltd. v. The Queen, (1974), 74 DTC 6529.
We trust the above is the information you require.
Yours truly,
K.H.Mfor DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch