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). CRA first noted that such no-fee guarantees generally give rise to an imputed investment by CRIC in Forco under 212.3(10)(b), before turning to the question below.
Q. 1(d)
If the resulting deemed dividend is reduced to nil by virtue of a full PUC grind under s. 212.3(7), it appears there could be multiple PUC grinds arising as a consequence of future Forco loans guaranteed by Canco without a fee. Comments? CRA stated:
[T]he mere repayment of the underlying debt (which would relieve the foreign controlled CRIC of its guarantee obligations) would not satisfy the requirements of subsection 212.3(9) in order to reinstate the PUC. …That being said…to the extent the CRIC demonstrates that… no more than 180 days before it [subsequently] reduces the PUC in respect of the class…[for which] an amount is required by paragraph 212.3(7)(b) to be deducted in computing the PUC, it has received dividends or a qualifying return of capital in respect of shares of the capital stock of the subject corporation, there would be an amount for the purposes of subparagraph 212.3(9)(c)(ii).