Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Marginal note:Amount owing by non-resident

• 17 (1) If this subsection applies to a corporation resident in Canada in respect of an amount owing to the corporation (in this subsection referred to as the “debt”), the corporation shall include in computing its income for a taxation year the amount determined by the formula

  A – B

  where

  A

  is the amount of interest that would be included in computing the corporation’s income for the year in respect of the debt if interest on the debt were computed at the prescribed rate for the period in the year during which the debt was outstanding; and

  B

  is the total of all amounts each of which is

  • (a) an amount included in computing the corporation’s income for the year as, on account of, in lieu of or in satisfaction of, interest in respect of the debt,

  • (b) an amount received or receivable by the corporation from a trust that is included in computing the corporation’s income for the year or a subsequent taxation year and that can reasonably be attributed to interest on the debt for the period in the year during which the debt was outstanding, or

  • (c) an amount included in computing the corporation’s income for the year or a subsequent taxation year under subsection 91(1) that can reasonably be attributed to interest on an amount owing (in this paragraph referred to as the “original debt”) — or if the amount of the original debt exceeds the amount of the debt, a portion of the original debt that is equal to the amount of the debt  — for the period in the year during which the debt was outstanding if

    • (i) without the existence of the original debt, subsection (2) would not have deemed the debt to be owed by the non-resident person referred to in paragraph (1.1)(a),

    • (ii) the original debt was owed by a non-resident person or a partnership each member of which is a non-resident person, and

    • (iii) where subsection (11.2) applies to the original debt,

      • (A) an amount determined under paragraph (11.2)(a) or (b) in respect of the original debt is an amount referred to in paragraph (2)(a), and because of the amount referred to in paragraph (2)(a), the debt is deemed to be owed by the non-resident person referred to in paragraph (1.1)(a), and

      • (B) the original debt was owing by an intermediate lender to an initial lender or by an intended borrower to an intermediate lender (within the meanings of those terms assigned by subsection (11.2)).

• Marginal note:Amount owing by non-resident

  (1.1) Subsection (1) applies to a corporation resident in Canada in respect of an amount owing to the corporation if, at any time in a taxation year of the corporation,

  • (a) a non-resident person owes the amount to the corporation;

  • (b) the amount has been or remains outstanding for more than a year; and

  • (c) the amount that would be determined for B in subsection (1), if that subsection applied, for the year in respect of the amount owing is less than the amount of interest that would be included in computing the corporation’s income for the year in respect of the amount owing if that interest were computed at a reasonable rate for the period in the year during which the amount was outstanding.

• Marginal note:Anti-avoidance rule — indirect loan

  (2) For the purpose of this section and subject to subsection (3), where

  • (a) a non-resident person owes an amount at any time to a particular person or partnership (other than a corporation resident in Canada), and

  • (b) it is reasonable to conclude that the amount or a portion of the amount became owing, or was permitted to remain owing, to the particular person or partnership because

    • (i) a corporation resident in Canada made a loan or transfer of property, or

    • (ii) the particular person or partnership anticipated that a corporation resident in Canada would make a loan or transfer of property,

    either directly or indirectly, in any manner whatever, to or for the benefit of any person or partnership (other than an exempt loan or transfer),

  the non-resident person is deemed at that time to owe to the corporation an amount equal to the amount, or the portion of the amount, as the case may be, owing to the particular person or partnership.

• Marginal note:Exception to anti-avoidance rule — indirect loan

  (3) Subsection (2) does not apply to an amount owing at any time by a non-resident person to a particular person or partnership where

  • (a) at that time, the non-resident person and the particular person or each member of the particular partnership, as the case may be, are controlled foreign affiliates of the corporation resident in Canada; or

  • (b) at that time,

    • (i) the non-resident person and the particular person are not related or the non-resident person and each member of the particular partnership are not related, as the case may be,

    • (ii) the terms or conditions made or imposed in respect of the amount owing, determined without reference to any loan or transfer of property by a corporation resident in Canada described in paragraph (2)(b) in respect of the amount owing, are such that persons dealing at arm’s length would have been willing to enter into them at the time that they were entered into, and

    • (iii) if there were an amount of interest payable on the amount owing at that time that would be required to be included in computing the income of a foreign affiliate of the corporation resident in Canada for a taxation year, that amount of interest would not be required to be included in computing the foreign accrual property income of the affiliate for that year.

• Marginal note:Anti-avoidance rule — loan through partnership

  (4) For the purpose of this section, where a non-resident person owes an amount at any time to a partnership and subsection (2) does not deem the non-resident person to owe an amount equal to that amount to a corporation resident in Canada, the non-resident person is deemed at that time to owe to each member of the partnership, on the same terms as those that apply in respect of the amount owing to the partnership, that proportion of the amount owing to the partnership at that time that

  • (a) the fair market value of the member’s interest in the partnership at that time

  is of

  • (b) the fair market value of all interests in the partnership at that time.

• Marginal note:Anti-avoidance rule — loan through trust

  (5) For the purpose of this section, where a non-resident person owes an amount at any time to a trust and subsection (2) does not deem the non-resident person to owe an amount equal to that amount to a corporation resident in Canada,

  • (a) where the trust is a non-discretionary trust at that time, the non-resident person is deemed at that time to owe to each beneficiary of the trust, on the same terms as those that apply in respect of the amount owing to the trust, that proportion of the amount owing to the trust that

    • (i) the fair market value of the beneficiary’s interest in the trust at that time

    is of

    • (ii) the fair market value of all the beneficial interests in the trust at that time; and

  • (b) in any other case, the non-resident person is deemed at that time to owe to each settlor in respect of the trust, on the same terms as those that apply in respect of the amount owing to the trust, an amount equal to the amount owing to the trust.

• Marginal note:Anti-avoidance rule — loan to partnership

  (6) For the purpose of this section, where a particular partnership owes an amount at any time to any person or any other partnership (in this subsection referred to as the “lender”), each member of the particular partnership is deemed to owe at that time to the lender, on the same terms as those that apply in respect of the amount owing by the particular partnership to the lender, that proportion of the amount owing to the lender that

  • (a) the fair market value of the member’s interest in the particular partnership at that time

  is of

  • (b) the fair market value of all interests in the particular partnership at that time.

• Marginal note:Exception

  (7) Subsection (1) does not apply in respect of an amount owing to a corporation resident in Canada by a non-resident person if a tax has been paid under Part XIII on the amount owing, except that, for the purpose of this subsection, tax under Part XIII is deemed not to have been paid on that portion of the amount owing in respect of which an amount was repaid or applied under subsection 227(6.1).

• Marginal note:Exception

  (8) Subsection (1) does not apply to a corporation resident in Canada for a taxation year of the corporation in respect of an amount owing to the corporation by a non-resident person if the non-resident person is a controlled foreign affiliate of the corporation throughout the period in the year during which the amount is owing to the extent that it is established that the amount owing

  • (a) arose as a loan or advance of money to the affiliate that the affiliate has used, throughout the period that began when the loan or advance was made and that ended at the earlier of the end of the year and the time at which the amount was repaid,

    • (i) for the purpose of earning

      • (A) income from an active business, as defined in subsection 95(1), of the affiliate, or

      • (B) income that was included in computing the income from an active business of the affiliate under subsection 95(2), or

    • (ii) for the purpose of making a loan or advance to another controlled foreign affiliate of the corporation where, if interest became payable on the loan or advance at any time in the period and the affiliate was required to include the interest in computing its income for a taxation year, that interest would not be required to be included in computing the affiliate’s foreign accrual property income for that year; or

  • (b) arose in the course of an active business, as defined in subsection 95(1), carried on by the affiliate throughout the period that began when the amount owing arose and that ended at the earlier of the end of the year and the time at which the amount was repaid.

• Marginal note:Borrowed money

  (8.1) Subsection (8.2) applies in respect of money (referred to in this subsection and in subsection (8.2) as “new borrowings”) that a controlled foreign affiliate of a particular corporation resident in Canada has borrowed from the particular corporation to the extent that the affiliate has used the new borrowings

  • (a) to repay money (referred to in this subsection and in subsection (8.2) as “previous borrowings”) previously borrowed from any person or partnership, if

    • (i) the previous borrowings became owing after the last time at which the affiliate became a controlled foreign affiliate of the particular corporation, and

    • (ii) the previous borrowings were, at all times after they became owing, used for a purpose described in subparagraph (8)(a)(i) or (ii); or

  • (b) to pay an amount owing (referred to in this subsection and in subsection (8.2) as the “unpaid purchase price”) by the affiliate for property previously acquired from any person or partnership, if

    • (i) the property was acquired, and the unpaid purchase price became owing, by the affiliate after the last time at which it became a controlled foreign affiliate of the particular corporation,

    • (ii) the unpaid purchase price is in respect of the property, and

    • (iii) throughout the period that began when the unpaid purchase price became owing by the affiliate and ended when the unpaid purchase price was so paid, the property had been used principally to earn income described in clause (8)(a)(i)(A) or (B).

• Marginal note:Deemed use

  (8.2) To the extent that this subsection applies in respect of new borrowings, the new borrowings are, for the purpose of subsection (8), deemed to have been used for the purpose for which the proceeds from the previous borrowings were used or were deemed by this subsection to have been used, or to acquire the property in respect of which the unpaid purchase price was payable, as the case may be.

• Marginal note:Exception

  (9) Subsection (1) does not apply to a corporation resident in Canada for a taxation year of the corporation in respect of an amount owing to the corporation by a non-resident person if

  • (a) the corporation is not related to the non-resident person throughout the period in the year during which the amount owing is outstanding;

  • (b) the amount owing arose in respect of goods sold or services provided to the non-resident person by the corporation in the ordinary course of the business carried on by the corporation; and

  • (c) the terms and conditions in respect of the amount owing are such that persons dealing at arm’s length would have been willing to enter into them at the time that they were entered into.

• Marginal note:Determination of whether related and controlled foreign affiliate status

  (10) For the purpose of this section, in determining whether persons are related to each other and whether a non-resident corporation is a controlled foreign affiliate of a corporation resident in Canada at any time,

  • (a) each member of a partnership is deemed to own that proportion of the number of shares of a class of the capital stock of a corporation owned by the partnership at that time that

    • (i) the fair market value of the member’s interest in the partnership at that time

    is of

    • (ii) the fair market value of all interests in the partnership at that time; and

  • (b) each beneficiary of a non-discretionary trust is deemed to own that proportion of the number of shares of a class of the capital stock of a corporation owned by the trust at that time that

    • (i) the fair market value of the beneficiary’s interest in the trust at that time

    is of

    • (ii) the fair market value of all the beneficial interests in the trust at that time.

• Marginal note:Determination of whether related

  (11) For the purpose of this section, in determining whether persons are related to each other at any time, each settlor in respect of a trust, other than a non-discretionary trust, is deemed to own the shares of a class of the capital stock of a corporation owned by the trust at that time.

• Marginal note:Determination of whether persons related

  (11.1) For the purposes of this section, in determining whether persons are related to each other at any time, any rights referred to in subparagraph 251(5)(b)(i) that exist at that time are deemed not to exist at that time to the extent that the exercise of those rights is prohibited at that time under a law of the country under the law of which the corporation was formed or last continued and is governed, that restricts the foreign ownership or control of the corporation.

• Marginal note:Back-to-back loans

  (11.2) For the purposes of subsection (2) and paragraph (3)(b), where a non-resident person, or a partnership each member of which is non-resident, (in this subsection referred to as the “intermediate lender”) makes a loan to a non-resident person, or a partnership each member of which is non-resident, (in this subsection referred to as the “intended borrower”) because the intermediate lender received a loan from another non-resident person, or a partnership each member of which is non-resident, (in this subsection referred to as the “initial lender”)

  • (a) the loan made by the intermediate lender to the intended borrower is deemed to have been made by the initial lender to the intended borrower (to the extent of the lesser of the amount of the loan made by the initial lender to the intermediate lender and the amount of the loan made by the intermediate lender to the intended borrower) under the same terms and conditions and at the same time as it was made by the intermediate lender; and

  • (b) the loan made by the initial lender to the intermediate lender and the loan made by the intermediate lender to the intended borrower are deemed not to have been made to the extent of the amount of the loan deemed to have been made under paragraph (a).

• Marginal note:Determination of whether persons related

  (11.3) For the purpose of applying paragraph (3)(b) in respect of a corporation resident in Canada described in paragraph (2)(b), in determining whether persons described in subparagraph (3)(b)(i) are related to each other at any time, any rights referred to in paragraph 251(5)(b) that otherwise exist at that time are deemed not to exist at that time where, if the rights were exercised immediately before that time,

  • (a) all of those persons would at that time be controlled foreign affiliates of the corporation resident in Canada; and

  • (b) because of subsection (8), subsection (1) would not apply to the corporation resident in Canada in respect of the amount that would, but for this subsection, have been deemed to have been owing at that time to the corporation resident in Canada by the non-resident person described in subparagraph (3)(b)(i).

• Marginal note:Determination of controlled foreign affiliate status

  (12) For the purpose of this section, in determining whether a non-resident person is a controlled foreign affiliate of a corporation resident in Canada at any time, each settlor in respect of a trust, other than a non-discretionary trust, is deemed to own that proportion of the number of shares of a class of the capital stock of a corporation owned by the trust at that time that one is of the number of settlors in respect of the trust at that time.

• Marginal note:Extended definition of controlled foreign affiliate

  (13) For the purpose of this section, where, at any time, two corporations resident in Canada are related (otherwise than because of a right referred to in paragraph 251(5)(b)), any corporation that is a controlled foreign affiliate of one of the corporations at that time is deemed to be a controlled foreign affiliate of the other corporation at that time.

• Marginal note:Anti-avoidance rule — where rights or shares issued, acquired or disposed of to avoid tax

  (14) For the purpose of this section,

  • (a) where any person or partnership has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares of the capital stock of a corporation and it can reasonably be considered that the principal purpose for the existence of the right is to avoid or reduce the amount of income that subsection (1) would otherwise require any corporation to include in computing its income for any taxation year, those shares are deemed to be owned by that person or partnership; and

  • (b) where any person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to avoid or reduce the amount of income that subsection (1) would otherwise require any corporation to include in computing its income for any taxation year, those shares are deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately before the acquisition, those shares are deemed not to have been issued.

• Marginal note:Definitions

  (15) The definitions in this subsection apply in this section.

  controlled foreign affiliate

  controlled foreign affiliate, at any time, of a taxpayer resident in Canada, means a corporation that would, at that time, be a controlled foreign affiliate of the taxpayer within the meaning assigned by the definition controlled foreign affiliate in subsection 95(1) if the word “or” were added at the end of paragraph (a) of that definition and

  • (a) subparagraph (b)(ii) of that definition were read as “all of the shares of the capital stock of the foreign affiliate that are owned at that time by persons resident in Canada who do not deal at arm’s length with the taxpayer,”; and

  • (b) subparagraph (b)(iv) of that definition were read as “all of the shares of the capital stock of the foreign affiliate that are owned at that time by persons resident in Canada who do not deal at arm’s length with any relevant Canadian shareholder;”. (société étrangère affiliée contrôlée)

  exempt loan or transfer

  exempt loan or transfer means

  • (a) a loan made by a corporation resident in Canada where the interest rate charged on the loan is not less than the interest rate that a lender and a borrower would have been willing to agree to if they were dealing at arm’s length with each other at the time the loan was made;

  • (b) a transfer of property (other than a transfer of property made for the purpose of acquiring shares of the capital stock of a foreign affiliate of a corporation or a foreign affiliate of a person resident in Canada with whom the corporation was not dealing at arm’s length) or payment of an amount owing by a corporation resident in Canada pursuant to an agreement made on terms and conditions that persons who were dealing at arm’s length at the time the agreement was entered into would have been willing to agree to;

  • (c) a dividend paid by a corporation resident in Canada on shares of a class of its capital stock; and

  • (d) a payment made by a corporation resident in Canada on a reduction of the paid-up capital in respect of shares of a class of its capital stock (not exceeding the total amount of the reduction). (prêt ou transfert de biens exclu)

  non-discretionary trust

  non-discretionary trust, at any time, means a trust in which all interests were vested indefeasibly at the beginning of the trust’s taxation year that includes that time. (fiducie non discrétionnaire)

  settlor

  settlor in respect of a trust at any time means any person or partnership that has made a loan or transfer of property, either directly or indirectly, in any manner whatever, to or for the benefit of the trust at or before that time, other than, where the person or partnership deals at arm’s length with the trust at that time,

  • (a) a loan made by the person or partnership to the trust at a reasonable rate of interest; or

  • (b) a transfer made by the person or partnership to the trust for fair market value consideration. (auteur)