19(1) Wyman W. Webb
613 957-210919(1)
Re: Subsection 18(6) of the Income Tax Act ("Act")
This is in reply to your letter of June 21, 1989 with respect to the application of subsection 18(6) of the Act.
It is your understanding that the Department will not apply subsection 18(6) of the Act to a loan (the "loan") by a Canadian holding company ("Canco") which is a wholly-owned subsidiary of a non-resident corporation ("Usco") to its wholly-owned Canadian subsidiary operating company ("Opco") in circumstances where the advance of funds (for the loan) by Usco to Canco meets the equity test of subsection 18(4) of the Act as applied to Canco but the loan by Canco to Opco does not satisfy such equity test as applied to Opco.
We do not agree with your understanding. In such circumstances, subsection 18(6) of the Act may well apply to deny the deduction of interest paid or payable by Opco to Canco upon that portion of the loan that exceeds the amount determined pursuant to subparagraph 18(4)(a)(ii) of the Act for Opco.
Paragraph 3 of Interpretation Bulletin IT-59R refers to the situation when subsection 18(4) of the Act applies to both the advance of funds from Usco to Canco and, with the aid of subsection 18(6) of the Act, to the loan. In this situation, to avoid double taxation, subsection 18(6) of the Act will not be applied to the loan if subsection 18(4) of the Act has been applied to the advance of funds.
Our comments contained herein are provided pursuant to the practice referred to in paragraph 24 of Information Circular 70-6R and are not rulings. If you have a particular fact situation similar to the circumstances outlined above, you may wish to apply for an advance income tax ruling in accordance with Information Circular 70-6R.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch