Principal Issues: Whether subsection 15(2) applies to a loan between a FA of a CanParent and a partnership, where all the members of the partnership are FAs of the CanParent.
Position: This question was sent to the Department of Finance for their consideration.
Reasons: It involves a policy concern.
2021 CTF Annual Conference
CRA Roundtable
Question 8: Loan from a FA to a Partnership held by two FAs
Assume CanParent has a number of wholly owned foreign affiliates (“FA”s), including FA1, FA2 and FA3. FA1 and FA2 are the sole members of a partnership (“P”). P borrows under an interest-bearing loan from FA3 to buy all of the issued shares of FA4 (the shares of FA4 are excluded property). Subsection 93.1(4) deems P to be a non-resident corporation for the purpose of applying clause 95(2)(a)(ii)(D). As a result, for the purposes of subdivision i of the Act, the interest paid by P to FA3 will be included in computing the income or loss from an active business of FA3. Technically, it seems possible that subsection 15(2) could apply as it is not clear that the exceptions in subsection 15(2.1) or 15(2.2) are met. However, this would appear to undermine the purpose of the foreign affiliate rules and subsection 93.1(4). Can CRA comment on whether it believes subsection 15(2) would apply in this situation?
CRA Response
Policy concerns regarding provisions of the Income Tax Act, such as the ones expressed in this question, should be brought to the attention of the Department of Finance. We have informed the Department of Finance about these policy concerns.
Cindy Yan/Yves Grondin
2021-091188
November 25, 2021