Global Tax Alert (News from Americas Tax Center) | 8 August 2013

Urgent action may be required on Canadian upstream loan rules

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On 26 June 2013, Bill C-48, Technical Tax Amendments Act, 2012, received Royal Assent and accordingly is fully enacted legislation. A more comprehensive listing of the major provisions contained in Bill C-48 is provided in our Global Tax Alert, Canada enacts omnibus technical bill (C-48), dated 27 June 2013. Due to the effective dates of the upstream loan rules contained within this legislation, urgent action may be required by some taxpayers to avoid significant adverse tax implications, or to file amended tax returns.

There are different considerations related to loans and indebtedness that were outstanding on 19 August 2011 versus new loans or indebtedness arising after 19 August 2011.

Upstream loan rules

The upstream loan rules target certain loans and other indebtedness owing to a foreign affiliate by certain non-arm’s length debtors. This includes a debtor that is a resident in Canada or a nonresident debtor that is not a controlled foreign affiliate of the relevant Canadian taxpayer (e.g., a foreign ultimate parent company or foreign sister company). In general, these new rules provide that the targeted upstream loans and indebtedness will, in whole or in part (and subject to certain exceptions), be included in the income of the foreign affiliate’s relevant Canadian taxpayer at the time the indebtedness arose.

Imminent implications

Generally, in order not to trigger an income inclusion for the relevant Canadian taxpayer, a loan or indebtedness will have to be repaid within two years of the day on which it arose (other than as part of a replicating series). Loans that were made and indebtedness that arose prior to 20 August 2011 are afforded a special transition rule. With respect to pre-20 August 2011 loans and indebtedness, if amounts are still outstanding on 19 August 2014, they are deemed to have arisen on 20 August 2014. Those loans or indebtedness must be repaid within two years of that day in order to avoid an income inclusion for the relevant Canadian taxpayer’s taxation year that includes 20 August 2014.

In contrast, loans made or indebtedness arising on or after 20 August 2011 should be repaid within two years of the day the indebtedness arose, in order to avoid the retroactive income inclusion, which could apply as early as the taxation year that includes 20 August 2011.

As these rules became enacted on 26 June 2013, companies that report under US GAAP should be accounting for the implications of these rules from that date. As previously communicated in our Global Tax Alert, Bill C-48 – 24 October federal tax measures substantively enacted, dated 22 November 2012, these rules were previously considered substantively enacted, on 21 November 2012 for IFRS reporting purposes.

Actions required

Canadian taxpayers that have foreign affiliates should immediately review the accounts of those foreign affiliates to determine if there are any outstanding upstream loans in place, as well as determine when and how they arose. In addition to balances arising from traditional loans, these rules may also apply to balances created through transactions such as cash pooling arrangements, and possibly trade accounts. According to the Explanatory Notes released with the legislation, the general anti-avoidance rules may also apply to sweep in certain economically equivalent transactions, and not simply loans and indebtedness.

If any such upstream loans exist, an immediate determination should be made as to when they must be repaid, and as to whether it will be feasible to do so in time to avoid an income inclusion. This analysis can be a complicated exercise, especially in the case of revolving intercompany accounts. In the event the loan or indebtedness is repaid, it is necessary to consider any foreign exchange implications. Where the loan or indebtedness is not repaid, consideration should be given to whether any exceptions apply and whether amended tax returns need to be filed.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto
  • Derek Alty
    +1 416 943 3860
    derek.g.alty@ca.ey.com
  • Yi-Wen Hsu
    +1 416 943 5310
    yi-wen.hsu@ca.ey.com
  • Mark Kaplan
    +1 416 943 3507
    mark.kaplan@ca.ey.com
  • Heather Kerr
    +1 416 943 3162
    heather.i.kerr@ca.ey.com
  • Terry McDowell
    +1 416 943 3600
    terry.j.mcdowell@ca.ey.com
  • Trevor O’Brien
    +1 416 943 5435
    trevor.obrien@ca.ey.com
  • Linda Tang
    +1 416 943 3421
    linda.y.tang@ca.ey.com
  • Andy Tse
    +1 416 943 3024
    andy.tse@ca.ey.com
Ernst & Young LLP (Canada), Montreal
  • Albert Anelli
    +1 514 874 4403
    albert.anelli@ca.ey.com
  • Angelo Nikolakakis
    +1 514 879 2862
    angelo.nikolakakis@ca.ey.com
  • Nicolas Legault
    +1 514 874 4404
    nicolas.legault@ca.ey.com
  • Nik Diksic
    +1 514 879 6537
    nik.diksic@ca.ey.com
Ernst & Young LLP (Canada), Calgary
  • Karen Nixon
    +1 403 206 5326
    karen.r.nixon@ca.ey.com
  • Mark Coleman
    +1 403 206 5147
    mark.coleman@ca.ey.com
Ernst & Young LLP (Canada), Vancouver
  • Eric Bretsen
    +1 604 899 3578
    eric.r.bretsen@ca.ey.com
Ernst & Young LLP, Canadian Tax Desk, New York
  • Andrea Lepitzki
    +1 212 773 5415
    andrea.lepitzki@ey.com

EYG no. CM3713