A loan from a foreign affiliate to its Canadian parent (Canco) generally must be repaid within two years lest the amount of the loan be included in Canco's income under s. 90(6). CRA was asked whether this payment requirement would be considered to be satisfied if the foreign affiliate is wound up (perhaps on the basis that there is an implicit set-off between the amount owing by Canco and the winding-up distribution payable by the foreign affiliate - see e.g., 2013 Ruling 2013-0498551R3). CRA responded:
We would not consider the loan to have been repaid for purposes of the upstream rules as a result of the liquidation in the described situation. Therefore, Canco would not be entitled to a deduction under subsection 90(14).
This and other issues with the upstream loan rules were brought to the attention of the Department of Finance by the CPA-CBA Joint Committee in their submission dated August 7, 2013. We anticipate that this issue will likely be resolved eventually through legislative amendment.