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New Shareholder Loan Elective Imputed Interest Benefit 

Canadian Tax Adviser

 

August 21, 2012

 

Proposed amendments to the shareholder loan rules in subsection 15(2) were introduced by Finance in its draft legislation released on August 14, 2012. These proposed changes would allow an elective imputation of interest on a "pertinent loan or indebtedness" that would otherwise have given rise to a deemed dividend. This new concept of a "pertinent loan or indebtedness" will also apply to loans that may have otherwise been subject to the foreign affiliate dumping rules. The election generally applies to such indebtedness that arose after March 28, 2012 and must be made in respect of all amounts owing to a particular non-resident debtor.

Background
Subsection 15(2) requires that certain shareholder indebtedness be included in the income of a shareholder. If the shareholder is a non-resident and subject to subsection 15(2), it is considered to have received a deemed dividend equal to the balance of the loan, to which non-resident withholding tax applies pursuant to subsection 214(3).

 

New election for deemed interest imputation
Subsection 15(2) is being amended to create an exception from the rules for a "pertinent loan or indebtedness". A "pertinent loan or indebtedness" is defined in proposed subsection 15(2.11) to generally include many loans or indebtedness to which subsection 15(2) would otherwise apply that become owing after March 28, 2012 to a corporation resident in Canada ("CRIC") by either a non-resident corporation that controls the CRIC (i.e., a non-resident parent) or a non-resident corporation that does not deal at arm's length with the non-resident parent. The CRIC and its non-resident parent can now jointly elect out of the shareholder benefit rules in subsection 15(2) and instead be subject to new interest imputation rules in proposed section 17.1. Once the joint election is filed, it then applies to all amounts owing by the non-resident to the CRIC.

 

The election must be filed before the CRIC's filing due date for the taxation year that includes the time after March 28, 2012 that the first such loan or indebtedness is owed from the non-resident.

 

Proposed section 17.1 replaces the deemed dividend on loans to certain non-resident shareholders under subsection 15(2) with a deemed interest income inclusion for pertinent loans or indebtedness. Proposed section 17.1 would require the CRIC to calculate this interest income on the loan at a prescribed rate where the actual rate of interest is less than the prescribed rate. The prescribed rate for this purpose would be 4% higher than the rate prescribed for purposes of section 17, or 5% for Q4 of 2012.

 

Proposed section 17.1 would apply to taxation years ending after March 28, 2012.

 

For more information, contact your KPMG adviser.

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