Canadian multinationals should remember to repay grandfathered upstream loans by August 19, 2016 to avoid repercussions.
Under the foreign affiliate (FA) rules enacted in 2013, qualifying debts that existed on August 19, 2011 ("grandfathered loans") and that were still outstanding on August 19, 2014 must be repaid by August 19, 2016, or else an income inclusion under subsection 90(6) is required.
If a grandfathered loan is not repaid by August 19, 2016, it must be included in the Canadian corporation's taxable income in the year that the loan was deemed to be made under subsection 90(6) (i.e., the taxation year that includes August 20, 2014). However, an offsetting deduction is available under subsection 90(9) equal to the total of certain surplus and adjust cost base amounts of the FA group that are available at the time the loan was deemed to be made.
The upstream loan rules in subsections 90(6) to 90(15) require a taxpayer to include in income an amount for a loan or indebtedness from an FA to a "specified debtor". The definition of specified debtor includes most persons that do not deal at arm's length with the taxpayer, other than certain Canadian controlled FAs.
Generally, for upstream loans made after August 19, 2011, a taxpayer is required to include the loan in its income for the taxation year that includes the time the loan was made, unless it is repaid within two years from that date, and the repayment is not part of a series of loans and repayments. If a loan remains unpaid at the end of two years and must therefore be included in a Canadian corporation's income, an offsetting deduction is available under subsection 90(9) equal to the total of certain surplus and adjusted cost base (ACB) amounts that could have been claimed under section 113 or subsection 91(5) had the loan instead been paid as a dividend by the lending FA to the Canadian taxpayer at the time that the loan was made. The upstream loan rules permit the taxpayer to claim a deduction under subsection 90(14) when the upstream loan is actually repaid.
The rules provide a transitional period for loans that existed on August 19, 2011 when these measures were first introduced. Loans that were entered into by August 19, 2011 and that remained outstanding on August 19, 2014 were deemed to be new loans issued on that date. Such grandfathered loans are then subject to the regular two-year repayment period, and must be repaid by August 19, 2016 to avoid being subject to the rules described above.
There are also relieving provisions in subsection 39(2.1) that apply to certain grandfathered loans. Generally, these rules provide foreign exchange capital gains relief on the repayment of such loans if the repayment takes place by August 19, 2016.
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Because the August 19, 2016 deadline is fast approaching, taxpayers with grandfathered upstream loans should ensure these loans are repaid before that date. However, the repayment cannot be part of a series of loans and repayments in order for it to be respected. If there are sufficient surplus and/or adjusted cost base (ACB) balances in the applicable FA group, an income inclusion may not be an issue, as it could be sheltered by an offsetting deduction.
However, the foreign exchange relieving provisions only apply to grandfathered loans that are repaid by August 19, 2016.
Top four reasons for repaying grandfathered upstream loans
Affected Canadian multinationals should consider repaying grandfathered loans by August 19, 2016 where:
For more information, contact your KPMG adviser.
Information is current to August 09, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.