The Basics of Offshore Tax Planning For Canadian Corporations – Part 8

The New Upstream Loan Rules

A Canco that will be using one or more Forcos as part of its offshore tax planning, should be aware of the new upstream loan rules.

Before the introduction of these rules, there were no Canadian tax consequences if Canco received a loan from Forco, even if that loan remained outstanding indefinitely.

Accordingly, if a dividend payment from Forco to Canco would have been taxable, because it was not derived from “exempt surplus”, Canco could, instead, just borrow money from Forco without paying any tax. This would be particularly relevant in connection with Forcos that operate in countries with which Canada has no tax treaty or tax information exchange agreement.

However, this all has now changed with the introduction of subsection 90(6) to the Act. Under this and related provisions, if Canco receives a loan from Forco, it will generally be taxed in Cancos’ hands, unless:

(a) It is repaid within two years of the day the loan was made,
(b) It was made in the ordinary course of business, or
(c) It can be offset by available surplus accounts in Forco that would be available to shelter a dividend.

Subsection 90(6) can also apply if the loan is made to another person with which Canco does not deal at arm’s length, such as an affiliate of Canco, rather than Canco itself. However, it will not apply to a loan made to a “controlled foreign affiliate” (“CFA”) of Canco. It can apply to a loan made to a “foreign affiliate” (“FA”) of Canco, that is not a FA. However, no amount will be taxable unless Canco’s participation percentage in the borrowing FA is less than its participating percentage in the lending FA.

These rules generally apply to loans that arise after August 19, 2011. However, if a loan that arose before that date is still outstanding on August 19, 2014, it will be treated as a new loan made on August 20, 2014. The end result is that taxpayers have until August 20, 2016 to repay loans outstanding on August 19, 2011 to avoid the application of these rules.

In the next article in this series, I will discuss strategies aimed at minimizing or deferring tax when the shares of Forco are sold.

In accordance with Circular 230 Disclosure

Mr. Atlas is a Toronto-based Chartered Accountant who practices as an independent consultant on a wide-range of international and domestic tax issues. Most of his practice consists of advising accounting and law firms on high-level tax issues. Prior to forming an independent tax practice in 1991, was Partner in charge of tax practice of major independent accounting firm in Toronto. Advises clients worldwide. Author of leading book, Canadian Taxation of Non-Residents, considered one of the few Canadian tax professionals, outside of the big accounting and law firms, who is an expert on high-level international tax matters.

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