Canada’s 2014 Budget Proposals On Back-To-Back Loans

The 2014 Canadian federal budget (Budget 2014) proposes to introduce to the Income Tax Act (Canada) (ITA) new anti-avoidance provisions regarding "back-to-back loans" that, where applicable, may affect the deductibility of interest and/or result in the imposition of Canadian withholding tax. These proposals do not have immediate effect – generally, they are proposed to apply after 2014.

The proposals are said to target financings provided to a Canadian by a related non-resident via an intermediary in order to avoid adverse consequences under the ITA that would otherwise arise if the financing were provided directly. However, as drafted, the proposals could also apply to a broader range of commercial arrangements. In particular, the proposals should be considered in the context of any cross-border financing transaction pursuant to which a Canadian is obligated to pay interest to an arm's-length party, and a non-arm's-length non-resident pledges or posts security or