On December 10, 1998, a Notice of Ways and Means Motion to Amend the Income Tax Act, (Canada) (the "Act") was tabled in Parliament. The Motion contains several amendments to the section 17 interest imputation rules that generally apply where a corporation resident in Canada lends money to a non-resident person on an interest-free or bargain interest basis and the loan remains outstanding for a year or more. The proposed amendments originally were intended to apply to taxation years that begin after February 23, 1998 (see commentary below regarding subsequent extension) and differ from the draft version released in October 1998.
The proposed amendments expand the application of section 17 of the Act to a loan from one non-resident of Canada to another where it is reasonable to conclude that the amount owing was connected to a loan or transfer of property from a corporation resident in Canada. Such a loan could subject the Canadian resident corporation to the new interest imputation rules even if it bears interest at market rates. Although draft section 17 contains several exceptions and limitations to the new anti-avoidance provisions (e.g., if both non-residents are controlled foreign affiliates of the Canadian corporation, if interest on the loan would otherwise be included in the Canadian corporation's income as foreign accrual property income or if a controlled foreign affiliate of the Canadian corporation used the money loaned to earn actual or deemed active business income), the current wording does not exempt many common international financing arrangements.
Officials in the Department of Finance have advised PricewaterhouseCoopers LLP that it was not the government's intention to have the new interest imputation rules apply to financing arrangements involving a non-resident lender and borrower that are ultimately controlled by a corporation resident in Canada. The Department has raised some concerns about providing relief where the non-resident lender and borrower are ultimately controlled by a non-resident of Canada.
On December 18, 1998, the Department of Finance issued a press release in response to representations received from taxpayers and their advisors that there was insufficient time to restructure corporate affairs to take into account the proposed amendments. Accordingly, the Minister of Finance has announced that subsections 17(2) and (3) in the Motion will apply only for taxation years commencing after 1999.
Parliament has adjourned for the Christmas break and is not scheduled to resume until February 1, 1999. Legislative debate and committee hearings on the proposals are not likely to occur until after the 1999 budget speech expected in late February.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor, or:
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