A wholly-owned foreign subsidiary (FS) of CanCo uses funds generated from its operations to make a non-interest bearing loan to a foreign borrower (FB), which is wholly owned by the foreign parent (FP) of CanCo. The loan is repaid within 2 years so that the upstream loan rules in s. 90(6) do not apply.
(i) Would s. 247 operate to deem interest income to FS which is FAPI to CanCo's income as FAPI; and, if so
(ii) would s. 80.4(2) deem a benefit to arise that is subject to Part XIII tax?
(i) After referring to its “long-standing view that subsection 247(2) could, in general, apply to a transaction between a foreign affiliate and another non-resident person in computing the foreign affiliate's FAPI in respect of a taxpayer, CRA stated:
[S]ubsection 247(2) would apply to adjust the interest income of FS on the loan between FS and FB to reflect an arm’s length rate of interest. The adjusted interest income to FS would be included in its FAPI … .
(ii) CRA stated (building on 2015-0622751I7):
The fact that subsection 247(2) could apply to adjust the interest income of FS on the loan between FS and FB and result in an income adjustment to FS for the purposes of its FAPI computation does not preclude subsection 80.4(2) from applying in respect of FB.
In the present case, subsection 80.4(2) would apply to deem FB to have received a benefit computed based on the prescribed rate under [Reg.] 4301(c) … . Subsection 15(9) deems the subsection 80.4(2) benefit to be a shareholder benefit under subsection 15(1). That shareholder benefit is then deemed to have been paid to FB as a dividend under paragraph 214(3)(a), which is subject to withholding tax under subsection 212(2) [which] FS would be required to withhold and remit … .
CRA also stated that s. 247(12) is inapplicable respecting the “primary adjustments” made in so applying s. 247(2).