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IFA 2014 Q. 3b - Upstream Loan
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English
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2014-0526731C6
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Principal Issues: Would accrued interest that is not yet due be treated as indebtedness for purposes of subsection 90(6)?
Position: Subsection 90(6) can apply to accrued interest that has not yet become payable under the terms of a loan.
Reasons: There need not be a payment due in respect of a liability in order for the liability to constitute a "debt".
IFA Roundtable, May 2014 Question 3(b)
Question 3(b): Upstream loan rules - Accrued interest on a loan to a specified debtor
Subsection 90(6) applies at the time a creditor affiliate that is a foreign affiliate of a taxpayer resident in Canada makes a loan to a specified debtor or when a specified debtor becomes indebted to the creditor affiliate.
If a loan made by a creditor affiliate to a specified debtor is interest-bearing, when is the amount of interest on the loan treated as indebtedness for purposes of subsection 90(6)? For example, if a loan provides that interest is payable together with principal on maturity of the loan, say after three years, would the interest be treated as indebtedness for purposes of subsection 90(6) when it accrued, when payment is due or at some other time?
CRA Response
In our view subsection 90(6) can apply to accrued interest that has not yet become payable under the terms of a loan. The example provided describes a loan with a three year term where interest and principal are payable together on the maturity of the loan. In such a case, we would consider subsection 90(6) to apply to the full amount of the principal portion of the loan, as well as to any interest that accrued in year one. Provided the loan and accrued interest are paid in full immediately upon the maturity of the loan, the interest that accrues in years two and three would be excepted from subsection 90(6) by paragraph 90(8)(a). In any event, a deduction under subsection 90(14) would be available when the loan, including accrued interest, is finally repaid.
Denise Basso
2014-052673