financing of non-residents and the rules under section 17
TRANSCRIPT
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Financing of Non-Residents
and the Rules Under
Section 17
May 29, 2010 – June 4, 2010
Evelyn (Evy) MoskowitzMoskowitz & Meredith LLP,
an affiliate of KPMG LLP
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Introduction
• Relevant to cross-border financings
where lender/creditor is a Canadian
resident corporation
• Rules result in deemed interest
inclusion to lender/creditor
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• Application
• Purpose
• The Rules
- The Old Rules
- The Current Rules
• Anomalies
Introduction
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Application of the Rules
Apply to both:
• Direct Loans or Debts
• Indirect Loans or Debts
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Application of the Rules
• Direct loan or debt rules apply if:
1 a non-resident person owes an amount to a Canco;
2 the amount owing has been outstanding for more than one year; and
3 interest on the amount owing, computed at a reasonable rate, has not been included in Canco’s income
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Application of the Rules
• Indirect loan or debt rules are complex
• Apply to back-to-back type of
transactions
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Purpose of the Rules
• To prevent Canco from employing its
capital outside Canada by way of
non-interest bearing loans or low
interest loans
• Otherwise Canco able to avoid
Canadian tax on all or part of income
derived from such capital
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Section 17 Rules
Direct Loan or
Debt Rules
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Section 17 Rules
Direct Loan or
Debt RulesIndirect Loan
or Debt Rules
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Section 17 Rules
Direct Loan or
Debt Rules
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
CFA
Exception
ss. 17(8)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(2)*
ss. 17(7)
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
CFA
Exception
ss. 17(8)
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Section 17 Rules
Charging
Provision
ss.17(1)
Direct Loan or
Debt Rules
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
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Section 17 Rules
Direct Loan or
Debt Rules• Amount Subject to s. 17
• The Lender
• The Borrower
Charging
Provision
ss.17(1)
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Section 17 Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
• The Borrower
• The Imputed Amount
Direct Loan or
Debt Rules
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Section 17 Rules
Direct Loan or
Debt Rules
Indirect Loan
or Debt Rules
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Section 17 Rules
Indirect Loan
or Debt Rules
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Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
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Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
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Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
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Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
• The Borrower
• The Imputed Amount
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Amount Subject to Section 17
Old Rules:
• Only applied to loans
• Not all indebtedness is a loan
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Loan versus Debt
• A purchases property from B
• A issues note to B for portion of purchase price
• Amount owing by A to B is not a loan. It is a debt.
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Loan versus Debt
• A makes loan to B
• A assigns loan to C
• Amount owing by B to C is not a loan. It is a debt.
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Amount Subject to Section 17
Current Rules:
• Apply to all amounts owing
• Therefore all indebtedness, whether in the form of loan or debt, caught
• Relationship between non-resident and Canco can be either borrower/lender or debtor/creditor
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
• The Borrower
• The Imputed Amount
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The Lender
Old Rules:
• Only applied where lender was a
Canadian resident corporation
• Did not apply if lender was an
individual, a partnership or a trust
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Current Rules:
• Also only apply where lender/creditor
is a Canadian resident corporation
BUT
• Look-through rules for partnerships
and trusts
[ss. 17(4) & 17(5)]
The Lender
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• Each partner or beneficiary deemed
to have lent, or to be owed, a
proportionate amount of loan or debt
• Proportion deemed to be owing on
same terms as apply to full amount
owing
Look-Through Rules Partnerships and Non-Discretionary Trusts
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• Proportion is:FMV of partner’s/beneficiary’s interest
FMV of all interests
• Section 17 only applies to that proportion of the loan or debt that is deemed made by, or owing to, a partner or beneficiary that is a Canadian resident corporation
Continued:
Look-Through Rules Partnerships and Non-Discretionary Trusts
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Continued:
• If trust is a discretionary trust,
different look-through rules apply
Look-Through Rules Discretionary Trusts
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
• The Borrower
• The Imputed Amount
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Old Rules:
• Could have been any non-resident
“person”
• Did not include a partnership
The Borrower
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The Borrower
Current Rules:
• Look-through rule for borrower partnerships [ss.17(6)]
• Similar to look-through rule for lender partnerships
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The Borrower
• Proportion deemed to be owing on same terms as full amount owing
• Section 17 only applies to proportion deemed owing by a non-resident partner
Continued:
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
• Amount Subject to s. 17
• The Lender
• The Borrower
• The Imputed Amount
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The Imputed Amount
Old Rules:
• Interest at prescribed rate
• No credit for interest actually received
• Retroactive application
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Current Rules:
• No retroactive application
• Credit for actual interest received
• Credit for trust amounts
The Imputed Amount
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The Imputed Amount
Individual
Individual Canco
Non-Discretionary Trust
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The Imputed Amount
Individual
Individual Canco
Non-Discretionary Trust Non-Resident
$30 of interest
$3,000 loan at 1%Assumptions:
• Reasonable rate is 6%
• Prescribed rate is 6%
• Beneficiaries share equally
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The Imputed Amount
$30 of interest
$3,000 loan at 1%
Non-Resident
$1000
Deemed Loan
Section 17
inclusion of $60
Assumptions:
• Reasonable rate is 6%
• Prescribed rate is 6%
• Beneficiaries share equally
Individual
Individual Canco
Non-Discretionary Trust
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The Imputed Amount
Current Rules:
• No retroactive application
• Credit for actual interest received
• Credit for trust amounts
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The Imputed Amount
Current Rules:
• No retroactive application
• Credit for actual interest received
• Credit for trust amounts
• Credit for FAPI
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
CFA
Exception
ss. 17(8)
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Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
CFA
Exception
ss. 17(8)
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CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
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CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
CFA Status
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CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
CFA Status Use Test
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CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
CFA Status Use Test
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test Control Test
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test Control Test
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test Control Test
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test Control Test
1% Threshold
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CFA Exception Controlled Foreign Affiliate Status
Two Tests
Foreign Affiliate Test Control Test
1% Threshold
10% Threshold
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Foreign Affiliate Examples
Canco
NRC
10% Class A
Example 1:
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Foreign Affiliate Examples
Canco Related
Person(s)
NRC
1%
Class A9%
Class B
Example 2:
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Foreign Affiliate Examples
Canco
Holdco
NRC
50%
20%
Example 3:
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Two Tests
Foreign Affiliate Test Control Test
1% Threshold
10% Threshold
CFA Exception Controlled Foreign Affiliate Status
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Two Tests
Foreign Affiliate Test Control Test
1% Threshold
10% Threshold
Actual Control by Canco alone
Deemed Control by
Canco if aggregate all
shares owned by:
CFA Exception Controlled Foreign Affiliate Status
1. Canco 2. Persons NAL to Canco
3. Four or fewer Cdns (other than 1 or 2)
4. Persons NAL with any person in 3
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Two Tests
Foreign Affiliate Test Control Test
1% Threshold
10% Threshold
Actual Control by Canco alone
Deemed Control by
Canco if aggregate all
shares owned by:
CFA Exception Controlled Foreign Affiliate Status
1. Canco 2. Persons NAL to Canco
3. Four or fewer Cdns (other than 1 or 2)
4. Persons NAL with any person in 3
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• Four modifications to CFA concept for section 17 purposes:
1 Must be Canadian- controlled
2 Related Controlled Foreign Affiliate Rule [ss. 17(13)]
3 Look-Through Rules [ss. 17(10) to 17(12)]
4 Anti-Avoidance Rules [ss. 17(14)]
CFA Exception Controlled Foreign Affiliate Status
![Page 72: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/72.jpg)
• Four modifications to CFA concept for section 17 purposes:
1 Must be Canadian- controlled
2 Related Controlled Foreign Affiliate Rule [ss. 17(13)]
3 Look-Through Rules [ss. 17(10) to 17(12)]
4 Anti-Avoidance Rules [ss. 17(14)]
CFA Exception Controlled Foreign Affiliate Status
![Page 73: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/73.jpg)
• Four modifications to CFA concept for section 17 purposes:
1 Must be Canadian- controlled
2 Related Controlled Foreign Affiliate Rule [ss. 17(13)]
3 Look-Through Rules [ss. 17(10) to 17(12)]
4 Anti-Avoidance Rules [ss. 17(14)]
CFA Exception Controlled Foreign Affiliate Status
![Page 74: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/74.jpg)
• Four modifications to CFA concept for section 17 purposes:
1 Must be Canadian- controlled
2 Related Controlled Foreign Affiliate Rule [ss. 17(13)]
3 Look-Through Rules [ss. 17(10) to 17(12)]
4 Anti-Avoidance Rules [ss. 17(14)]
CFA Exception Controlled Foreign Affiliate Status
![Page 75: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/75.jpg)
• Four modifications to CFA concept for section 17 purposes:
1 Must be Canadian- controlled
2 Related Controlled Foreign Affiliate Rule [ss. 17(13)]
3 Look-Through Rules [ss. 17(10) to 17(12)]
4 Anti-Avoidance Rules [ss. 17(14)]
CFA Exception Controlled Foreign Affiliate Status
![Page 76: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/76.jpg)
CFA Modifications Related Controlled Foreign Affiliate Rule
• A CFA of a Canadian corporation
related to Canco will also be a CFA
of Canco
![Page 77: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/77.jpg)
CFA Modifications Related Controlled Foreign Affiliate Rule
Parent
Canco 1 Canco 2
CFA 1 CFA 2
![Page 78: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/78.jpg)
Section 17 Rules
Direct Loan or
Debt Rules
Charging
Provision
ss.17(1)
Part XIII
Exception
ss. 17(7)
ss. 17(2)*
Trade
Receivables
Exception
ss. 17(9)
SCC
Exception
ss. 17(3)*
CFA
Exception
ss. 17(8)
![Page 79: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/79.jpg)
CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
CFA Status Use Test
![Page 80: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/80.jpg)
CFA Exception
Direct Loan or
Debt Rules
CFA
Exception
ss. 17(8)
CFA Status Use Test
![Page 81: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/81.jpg)
CFA ExceptionUse Test
• CFA must use loan/debt proceeds in its
active business
• Active business defined in ss. 95(1)
• Does not include an investment business
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• If not used in its own business, CFA may generally on-lend or pay over funds to another non-resident corporation (or, possibly, a partnership)
• Other non-resident corporation must be a foreign affiliate of Canco in which Canco has a qualifying interest (or a partnership of which such foreign affiliate, or the CFA, is a “qualifying member”)
CFA ExceptionUse Test
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• Loan to second-tier borrower may be
interest-bearing or interest-free
depending on the circumstances
• Relationship of second-tier borrower
to Canco will also differ depending on
the circumstances
CFA ExceptionUse Test
Continued:
![Page 84: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/84.jpg)
CFA ExceptionUse Test
Continued:
• Use Test far more complicated than it
appears on its face
• Incorporates by reference many of
the requirements of the foreign
affiliate regime
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Section 17 Rules
Indirect Loan
or Debt Rules
![Page 86: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/86.jpg)
Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
![Page 87: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/87.jpg)
Indirect Loan or Debt Rules Charging Provisions
Need at least 3 parties:
• A Canco
• An Intermediary (can’t be a Canco)
• A Non-Resident Borrower/Debtor
![Page 88: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/88.jpg)
Indirect Loan or Debt Rules Charging Provisions
Then 2 conditions:
1 Non-Resident Borrower/Debtor (the
“Second-Tier Borrower”) must owe an
amount to the Intermediary
AND
![Page 89: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/89.jpg)
Indirect Loan or Debt Rules Charging Provisions
2 Must be reasonable to conclude thatamount became owing because aCanco transferred or loanedproperty to any person
Continued:
i.e., must be causal link (cash flow or
otherwise) between Canco’s transfer or
loan and the amount owing by the Second-
Tier Borrower
![Page 90: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/90.jpg)
Indirect Loan or Debt Rules Charging Provision
• This deemed loan or debt is the indirect loan or debt
• Indirect loan or debt now must be analyzed as a direct loan or debt under ss. 17(1)
• If these conditions satisfied Second-
Tier Borrower deemed to owe to
Canco an amount equal to amount
owed to the Intermediary
![Page 91: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/91.jpg)
loan
USco
Canco
100% 100%
100%
CFA US Opco
shares
Subsection 17(2) Example
![Page 92: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/92.jpg)
loan
USco
Canco
100% 100%
100%
CFA US Opco
shares
Subsection 17(2) Example
![Page 93: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/93.jpg)
loan
USco
Canco
100% 100%
100%
CFA US Opco
shares
Subsection 17(2) Example
![Page 94: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/94.jpg)
loan
USco
Canco
100% 100%
100%
CFA US Opco
shares
deemed loan
Subsection 17(2) Example
![Page 95: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/95.jpg)
Indirect Loan or Debt Rules Charging Provision
• Does not deem amount owing by Second-Tier Borrower to Intermediary to instead be owing to Canco
• Indirect Loan or Debt Rules override look-through rules in ss. 17(4) & 17(5)
![Page 96: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/96.jpg)
$30 of interest
$3,000 loan at 1%
Non-Resident
$1000
Deemed Loan
Section 17
inclusion of $60
Individual
Individual Canco
Non-Discretionary Trust
Indirect Loan or Debt Rules Charging Provision
![Page 97: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/97.jpg)
loan
USco
Canco
100% 100%
100%
CFA US Opco
shares
Subsection 17(2) Example
![Page 98: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/98.jpg)
Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
![Page 99: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/99.jpg)
Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
![Page 100: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/100.jpg)
Indirect Loan or Debt Rules CFA Exception
• Not to be confused with CFA
exception in ss. 17(8)
• Requires that both the Intermediary
and Second-Tier Borrower be CFA’s
of Canco
• Found in p. 17(3)(a)
![Page 101: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/101.jpg)
Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
![Page 102: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/102.jpg)
Indirect Loan or Debt RulesExempt of Loan or Transfer Exception
• Focuses on relationship between Canco and Person A
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USco
Canco
100% 100%
100%
CFA US Opcoloan
shares
Indirect Loan or Debt RulesExempt of Loan or Transfer Exception
![Page 104: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/104.jpg)
Indirect Loan or Debt RulesExempt of Loan or Transfer Exception
• Loan with arm’s length rate of interest
• Transfer of property or payment of
amount if on arm’s length terms (does
not apply to transfers for shares of a FA)
• Payment of a dividend
• Return of paid-up capital
![Page 105: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/105.jpg)
USco
Canco
100% 100%
100%
CFA US Opcoloan
Exempt
Loan or
Transfer
shares
Indirect Loan or Debt RulesExempt of Loan or Transfer Exception
![Page 106: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/106.jpg)
Section 17 Rules
Indirect Loan
or Debt Rules
Charging
Provision
ss. 17(2)
CFA
Exception
p. 17(3)(a)
Exempt
Loan or
Transfer
Exception
ss. 17(2) &
17(15)
Arm’s
Length
Indebtedness
Exception
p. 17(3)(b)
![Page 107: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/107.jpg)
• Found in p. 17(3)(b)
• Focuses on transaction between the
Non-Resident Borrower/Debtor and the
Intermediary
Indirect Loan or Debt RulesArm’s Length Indebtedness Exception
![Page 108: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/108.jpg)
USco
Canco
100% 100%
100%
CFAloan
shares
Arm’s Length Indebtedness
Exception
US Opco
Indirect Loan or Debt RulesArm’s Length Indebtedness Exception
![Page 109: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/109.jpg)
• Requires that:
- parties be unrelated
- terms of the indebtedness be arm’s
length
- interest on the indebtedness, if it
were payable, would not be FAPI of
an FA of Canco
Indirect Loan or Debt RulesArm’s Length Indebtedness Exception
![Page 110: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/110.jpg)
Double Taxation
CancoRelated Non-
Resident
NRC “A”
NRC “B”
100%
5% 95%
$100
Loan 1
(interest-
free)
$100
Loan 2
(interest-
free)
![Page 111: Financing of Non-Residents and the Rules Under Section 17](https://reader033.vdocuments.site/reader033/viewer/2022051801/628187149c828e50f8642892/html5/thumbnails/111.jpg)
Multiple Taxation/Multiple Cancos
Canco 1
Canco 2
Related Non-
Resident100%
$100
Loan 1A
(interest-
free)
NRC “A”5% 95%
$100
Loan 1B
(interest-
free)
NRC “B”
100%$100
Loan 2
(interest-
free)