CASE STUDY #13
Recommended Solution:
(1) Review of the Act:
The provisions of section 17 of the Act deal with loans
non-resident person. Since Canco has not made the loan
to Canco Germany then subsection 17(1) cannot apply to
offset the interest expense claimed by Canco. (2) Identification of a Tax Benefit:
Canco has interest expenses which it will utilize to
income taxes and the interest income earned with the
funds will be taxed in Germany where Canco Germany,
a wholly-owned subsidiary, has losses. In effect, the
losses of the German subsidiary are being transferred
to Canada. This reduction of taxes would constitute a
tax benefit for the purposes of subsection 245(1). (3) Identification of an Avoidance Transaction:
There does not appear to be any business purpose for
undertaking the series of transactions other than to
circumvent the provisions of subsection 17(1). The
series of transactions effected by Canco would be
considered to have been undertaken to obtain the
identified tax benefit. The borrowing of the funds in
Canada would constitute an avoidance transaction for the
purposes of subsection 245(3). (4) Misuse or Abuse of the Act:
The series of transactions results in a direct abuse of
the provisions of the Act read as a whole and the
transactions, as such, would not qualify for subsection
245(4) exemption from the application of the provision of
subsection 245(2). (5) Application of GAAR:
Since the series of transactions was undertaken to
circumvent the provisions of subsection 17(1),
subsection 245(2) would apply to subject the Canadian
debt to the provisions of subsection 17(1). Note,
however, that it is not known if the loan was
outstanding in excess of one year. If it was not,
then subsection 17(1) would not apply and,
consequently, it would be extremely difficult to apply
subsection 245(2) to the series of transactions.000171