| EACC9680 |
QUESTION
A Canadian corporation ("CANCO") is the parent company of a wholly owned U.S. subsidiary ("USCO"). CANCO loans funds to USCO on an interest free basis. Does the loan qualify for non-imputation of interest income under Canadian tax rules?
REVENUE CANADA'S POSITION
If the loan remains outstanding for one year or longer, interest will be imputed to CANCO pursuant subsection 17(1) of the Canadian Income Tax Act (the "Act"). However, where money is loaned by a corporation resident in Canada to a subsidiary controlled corporation resident outside Canada which uses the money in its business for the purpose of gaining or producing income, subsection 17(3) of the Act excepts the loan from the application of subsection 17(1) of the Act.