The Corporate Borrower Requirement And Back-To-Back Loans

Article by Kathleen Penny, ©2005 Blake, Cassels & Graydon LLP

This article was originally published in Blakes Bulletin on Taxation - April 2005

The Canada Revenue Agency (the CRA) has recently issued several administrative income tax rulings which expand the possible application of the 5/25 exemption for interest paid by Canadian corporate borrowers, by blessing back-to-back loan arrangements. The rulings confirm that the general anti-avoidance rule (GAAR) would not be applied to deny the 5/25 exemption in the circumstances presented.

The 5/25 exemption is not available if the Canadian debtor borrowing from the non-resident lender is a Canadian resident individual, a Canadian resident trust, or a partnership with one or more non-corporate partners. As a result, the exemption has not been available in a number of common situations in which Canadian entities may have wished to borrow from a non-resident of Canada. Because individuals do not qualify, the