Principal Issues: (1) Is the phrase "owes an amount" limited to money that is loaned? (2) What is the relevant time in determining when an amount remains outstanding under subsection 17(1) in a situation where a non-interest bearing loan from a foreign affiliate (FA) of a corporation resident in Canada (Canco) to another non-resident (Forco) is transferred to Canco? (3) Does a deposit in a Bank constitute a loan for the purpose of applying subsection 17(11.2)?
Position: (1) No. (2) The relevant time period for subsection 17(1) is the time period for which the amount is owed by a Forco to Canco. (3) Yes.
Reasons: (1) Reading of subsection 17(1) and definition of "amount" in subsection 248(1). (2) See above. (3) It is our long-standing position that a deposit is considered a loan to the Bank.
XXXXXXXXXX 2003-001723 Shelley Lewis (613) 957-2118 March 9, 2011
Dear XXXXXXXXXX :
Re: Amounts Owed by Non-Residents under Section 17
We are writing in response to your request regarding our views on the application of section 17 of the Income Tax Act (the "Act"). We apologize for the delay in responding.
In particular, you have requested an interpretation on the following issues:
1. Whether the term "amount owing" in subsection 17(1) of the Act is limited to money that is loaned or would apply to any of the following amounts:
(a) an amount that is owing by a non-resident to a corporation resident in Canada as consideration for the transfer of property by the corporation resident in Canada pursuant to a transfer agreement;
(b) the entitlement to an amount that is owing by a non-resident person that has been transferred to a corporation resident in Canada;
(c) an amount that is owing to a corporation resident in Canada in respect of unpaid dividends declared by a non-resident corporation; or
(d) an amount receivable from a non-resident that has been accrued by a corporation resident in Canada even though the amount is not legally owing.
2. What is the relevant time in determining when an amount remains outstanding, under subsection 17(1) of the Act, in a situation where a non-interest bearing loan made to a non-resident is transferred from a foreign affiliate of corporation resident in Canada to the corporation resident in Canada ("Canco")?
3. Whether a deposit in a bank constitutes a loan for the purpose of applying subsection 17(11.2) of the Act.
Our Comments
1. An amount owing
In determining what sort of liabilities should be included in subsection 17 of the Act, as an amount owing, it is helpful to look at the definition of "owe".
Subsection 248(1) of the Act defines "amount" to mean ... money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing..."
The term "owe" is not defined in the Act, however, the Compact Oxford English Dictionary (online) defines owe as:
1. be required to pay (money or goods) to (someone) in return for something received. 2. be morally obliged to show (gratitude, respect, etc.) or to offer (an explanation) to (someone). 3. (owe something to) have something because of. 4. be indebted to someone or something for: I owe my life to you.
Black's Law Dictionary (footnote 1) defines "owing" as "that is yet to be paid; owed; due". It further defines a debt as "liability on a claim; specific sum of money due by agreement or otherwise... 2. the aggregate of all existing claims against a person, entity or state; 3. a non-monetary thing that one person owes another, such as goods or services".
In our view, there is no reason for the word "amount" in subsection 17(1) of the Act to be restricted from the broad meaning it is given in subsection 248(1) of the Act. The term "amount owing" was specifically chosen by the legislator to avoid the restrictive interpretation given to the word "loan" which was used in subsection 17(1) of the Act as it was prior to being amended by S.C. 1999, c. 22.
The meaning of the term "amount owing" is broad and could include any of the amounts discussed in (a) through (d) above, as such, in our view all the amounts described above will be considered an amount owing and subject to subsection 17(1) of the Act.
2. The relevant time for determining when an amount has been or remains outstanding
You provided an example where Canco owns a foreign affiliate ("FA1") that made a non-interest bearing loan to another non-resident ("Forco") on February 1st of Year One but on November 15th of Year One, FA1 transferred the loan receivable to Canco and Forco repaid the loan to Canco on March 1st of Year Two. You asked if, for the purposes of subsection 17(1) of the Act, Forco will be considered to have an amount owing to Canco that has been outstanding for more than one year? We have assumed for the purposes of our reply that subsection 17(2) does not apply to the loan by FA1 to Forco.
In our view the "amount owing" referred to in subsection 17(1) of the Act is the amount that a particular non-resident owes the corporation resident in Canada. It does not matter when a particular indebtedness is incurred by a non-resident. What is relevant is when it became an amount owing to the corporation resident in Canada and how long it remains owing to that corporation resident in Canada. Consequently, in the situation above, where a non-interest bearing loan that was made to Forco is transferred from FA1 to Canco, Canco would not be subject to tax under subsection 17(1) of the Act when Forco repaid the loan within a year of the date of transfer. This is because, although the loan to Forco remained outstanding for more than one year, the loan was only owing to Canco for three and half months.
3. Deposit on a loan
In your correspondence you noted that it was common for back-to-back loans to be made through financial institutions, whereby a deposit is made to the institution which then makes a loan to an intended borrower. It is your view that it is unclear whether a deposit to a bank by an "initial lender" (as that term in defined in subsection 17(11.2)) would be considered a loan for the purposes of subsection 17(11.2) of the Act.
As you noted the Income Tax Rulings Directorate has issued a number of interpretations that discuss whether a deposit in a financial institution constitutes a loan. Those interpretations reflect our long standing position that a deposit is considered a loan to the financial institution. In our view there is nothing about the context of subsection 17(11.2) of the Act to restrict the interpretation of the word "loan" to exclude a deposit in a financial institution.
We trust that these comments will be of assistance.
Yours truly,
Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Seventh ed., (United States: West Publishing Co., 1999).