Forco, a controlled foreign affiliate Canco (which in turn is controlled by non-resident Parent, but with a minority of its shares held by arm's-length persons), borrows funds from a related non-resident entity for use in its active business. Although Canco does not charge a fee for its guarantee of the Forco debt, s. 247(7.1) applies, so that there is no adjustment to the nil fee under s. 247(2).
Q. 1(a)
Does the no-fee guarantee constitute a conferral of a benefit so that there is an "investment" under s. 212.3(10)? CRA stated:
[J]ust as it has been CRA's longstanding position that a corporation guaranteeing the debt of a shareholder for no fee can be viewed as the conferral of a benefit for the purposes of subsection 15(1), in the inverse situation where a CRIC guarantees the debt of a subject corporation for no fee, CRA is of the view that there can be a benefit conferred for the purposes of paragraph 212.3(10)(b).
Q. 1(b)
Canco arguably is not conferring a benefit on Forco, since Canco benefits from Forco's access to debt capital. In what circumstances would CRA consider the provision of the guarantee by Canco for no fee not to be a conferral of a benefit for purposes of s. 212.3(10)(b)? CRA stated:
…CRA would generally not view the provision of such a guarantee as the conferral of a benefit if fair market value consideration were otherwise given in exchange for the guarantee and it would be reasonable in the circumstances to conclude that a party dealing at arm's length would provide the guarantee on the same terms.
Q.1(c)
What is the resulting investment's quantum? CRA stated:
[T]he quantum of the benefit… is the fair market value of the benefit at the time the investment is made (i.e., when the benefit is conferred)…[which] is a factual determination… .