D.H. Tingley (613) 995-1178
April 30, 1982
Re: Interest Free Loan to a Canadian Corporation
This is in reply to your letter of April 7, 1982 asking us to confirm that subsections 15(2), 16(l), 245(l) and 245(2) of the Income Tax Act ("Act") will not apply to require either party to an interest free loan to include any amount in their incomes in a situation where the lender and borrower are related Canadian corporations (within the meaning of subParagraph 251 (2) (c) (i) and paragraph 89 (1) (a) of the Act) carrying on active businesses in unrelated fields.
We confirm that subsections 15(2), 16(1) and 245(1) of the Act would not ordinarily apply to such a situation. Loans made to corporations resident in Canada are excluded from the applications of subsection 15(2) of the Act. Subsection 16(1) of the ,Act is not designed for the above-meentioned situation although it could be argued in sinilar circumstances that repayments of the loan might 'reasonably be regarded as being in part a payment of interest... and in part's payment of a capital nature". As there are no deductions or exnnnses contemplated in your situation, subsection 245(1) of the Act would not be applicable.
However, subsections 15(1), 56(2) or 245(2) of the Act might well apply to such a loan transaction.
Generally, the Department will not apply subsection 15(1) of the Act in respect of intercompany loans arising in the course of carrying on the businesses of the two corporations. The Department may, however, seek to impute interest in those situations where the interest free loan results in any undue tax advantage being conferred on the borrower. Some examples of situations where the Department considers that an undue tax advantage has been conferred on the borrower are outlined in interpretation Bulletin IT-445 .
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR R.D. WEIL
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
DHT/rb