( Disponible en anglais seulement )
IN THIS SECTION:
- PLOI Relieving Rule for Subsection 15(2) Shareholder Indebtedness
- Scope of PLOI Exception
- PLOI Elections
- Certain Reorganizations Involving Canadian Resident Corporate Creditors
- Deemed Interest Income
- To File or Not to File a PLOI Election?
- Application Date
As discussed above, PLOI is excepted from the adverse application of section 212.3. PLOI is also excepted from the adverse application of subsection 15(2) of the Act, although the indebtedness that qualifies for the PLOI exception from subsection 15(2) is different than that which is excepted from section 212.3.
Subsection 15(2) and paragraph 214(3)(a) of the Act generally deem (subject to various exceptions) indebtedness12 owing to a Canadian resident corporation (“Canco”) or a resident corporation not dealing at arm’s length with Canco by a non-resident shareholder of Canco or a non-resident person not dealing at arm’s length with a shareholder of Canco to be a shareholder benefit subject to Canadian withholding tax if not repaid within one year after the end of the taxation year of the relevant Canadian creditor in which the indebtedness arose.13 Indebtedness that is PLOI is excluded from the application of this rule under subsection 15(2.11) of the Act.
The PLOI exception in subsection 15(2.11) applies if all of the following conditions are met:
- Subsection 15(2) would, in the absence of subsection 15(2.11), apply to the amount owing.
- The amount becomes owing after March 28, 2012.
- The indebtedness is incurred by a non-resident corporation (“NR Debtorco”) or by a partnership of which NR Debtorco is a member.
- The amount is owed to a Canco that is controlled by NR Debtorco or by a non-resident corporation that does not deal at arm’s length with NR Debtorco (referred to in subsection 15(2.11) and in this section as a “CRIC”) or is owed to a partnership, all the partners of which are, directly or indirectly, the CRIC or another Canco related to the CRIC (referred to in subsection 15(2.11) and in this section as a “Qualifying Canadian Partnership”).
- A joint election is filed with CRA under subparagraph 15(2.11)(d)(i) or 15(2.11)(d)(ii) in respect of the amount owing (collectively referred to in this section as the “PLOI Elections”).
The exception from subsection 15(2) for PLOI is not automatic. Where the amount is owed to a CRIC, the CRIC and the non-resident corporation that controls the CRIC must jointly elect under subparagraph 15(2.11)(d)(i) of the Act for debt to be PLOI. If the amount is owed to a Qualifying Canadian Partnership, all of the members of the partnership and the non-resident corporation that controls the CRIC must jointly elect under subparagraph 15(2.11)(d)(ii) for debt to be PLOI.
The PLOI Elections must be made by the non-resident corporation that controls the CRIC even if the amount is owed by another NR Debtco in the group or by a partnership of which another non-resident corporation in the group is a member.
The PLOI Elections are made on a debt by debt basis for qualifying debtor/creditor relationships. It does not appear that the election can be revoked.
The PLOI election under subparagraph 15(2.11)(d)(i) must be filed with the CRA on or before the income tax return filing-due date of the CRIC for the CRIC’s taxation year in which the post-March 28, 2012 debt becomes owing to the CRIC by the relevant NR Debtco. The subparagraph 15(2.11)(d)(ii) PLOI election must be filed with the CRA on or before the income tax return filing-due date of the CRIC for the CRIC’s taxation year in which the fiscal period of the Qualifying Canadian Partnership ends and during which the post-March 28, 2012 debt becomes owing by the relevant NR Debtco. Late filing of the election is permitted within three years after the filing deadline if a late filing penalty is paid.14
The PLOI Elections under subsection 15(2.11) are different than the paragraph 212.3(11)(c) election to except NR Subjectco indebtedness from section 212.3. Subsection 15(2) does not apply to indebtedness of a foreign affiliate owing to a corporation resident in Canada so there ought not to be any overlap between the paragraph 212.3(11)(c) election for indebtedness of an NR Subjectco (which will generally be a foreign affiliate) and the PLOI Elections under subsection 15(2.11), which should not be required for indebtedness of foreign affiliates.
A PLOI will be deemed to continue to be a PLOI excepted from subsection 15(2) in the event that a wholly-owned Canadian resident corporate creditor is vertically amalgamated with its parent or its parent and one or more Canadian resident corporations wholly-owned by the parent under subsection 87(11) of the Act, or is wound-up into another Canadian resident corporation that owns not less than 90% of each class of shares of the Canadian resident corporate creditor where any shares of the Canadian resident corporate creditor not held by the parent are owned by persons dealing at arm’s length with the parent, in accordance with subsection 88(1) of the Act.
The deemed interest income rule in subsection 17(1) of the Act that applies to indebtedness of a non-resident owing to a Canadian resident corporation outstanding for more than one year will not apply to PLOI. Instead, there is a deemed income inclusion under new section 17.1 for any period that the PLOI is outstanding. The deemed interest inclusion under section 17.1 applies to indebtedness that is elected as PLOI under paragraph 212.3(11)(c) and to indebtedness that is elected as PLOI under paragraph 15(2.11)(d). The deemed interest is calculated as the greater of:
- interest on the PLOI computed at the prescribed rate, and
- the total interest expense payable in respect of the period in the taxation year, or the fiscal period, as applicable, during which the amount owing was a PLOI, by the CRIC, the Qualifying Canadian Partnership, Canadian resident persons with whom the CRIC did not, at the time the PLOI arose, deal at arm’s length, or a partnership of which the CRIC or such non-arm’s length person is a member, in respect of a debt obligation entered into as part of the same series of transactions or events as the PLOI, to the extent that the proceeds of such indebtedness can reasonably be considered to have directly or indirectly funded, in whole or in part, the PLOI,
less the amount otherwise included in computing the income of the CRIC for the taxation year or the income of the Qualifying Canadian Partnership for the relevant fiscal period, as the case may be, on account of, in lieu of, or in satisfaction of, interest in respect of the amount owing for the period in the taxation year, or the fiscal period, during which the amount owing was a PLOI.
The effect of new section 17.1 is to require an annual income inclusion for PLOI at least equal to a prescribed rate commencing from the time the PLOI arises. The prescribed rate is the arrears interest rate for unpaid taxes.15 The measurement of the section 17.1 income inclusion by reference to interest expense incurred by the Canadian creditor, where this interest expense is greater than the prescribed rate, prevents the Canadian creditor from obtaining a net deduction by borrowing to loan to a non-resident.
If at any time a NR Parentco (within the meaning of the foreign affiliate dumping rules) acquires control of a CRIC and the CRIC was not controlled immediately before that time by a non-resident person, no amount is to be included under section 17.1 in computing the income of the CRIC in respect of PLOI (within the meaning of the foreign affiliate dumping rules) for the period beginning at the time control is acquired and ending 180 days after such time. This rule provides transitional relief in the case of an acquisition of control. Additional transitional relief is available for acquisitions of control that occurred before October 15, 2012.
Indebtedness that would otherwise be PLOI, and so excepted from the foreign affiliate dumping rules and subsection 15(2), is deemed not to be PLOI in certain circumstances where a tax treaty limits the amount included in the CRIC’s or the Qualifying Canadian Partnership’s income in respect of the indebtedness. If the amount to be included in the income of a CRIC or a Qualifying Canadian Partnership in respect of the indebtedness for a particular taxation year or fiscal period, as applicable, is less under the provisions of a tax treaty than the amount that would be included under section 17.1 if no tax treaty applied, then the indebtedness is deemed by subsection 17.1(3) not to be PLOI. This exclusion appears to be targeted at situations where the amount included in a CRIC’s income is restricted to a lesser amount under the transfer pricing rules in a tax treaty. An income inclusion under section 17.1 could be in excess of an arm’s length rate because of the additional 4% component included in the applicable prescribed rate.
Where subsection 17.1(3) deems indebtedness not to be PLOI, the taxpayer cannot rely on the status of the indebtedness as PLOI to avoid the application of the foreign affiliate dumping rules or subsection 15(2). Because it is often difficult to know in advance precisely what interest rate will satisfy transfer pricing principles, this provision creates considerable uncertainty. Practically, if the CRIC includes the section 17.1 interest in income without claiming treaty protection, CRA may not challenge the status of indebtedness as PLOI for section 212.3 or subsection 15(2) purposes. However, there is no guarantee that CRA will not do so.
Whether making a subsection 15(2.11) PLOI election makes sense in a particular situation will require some analysis. The comparison is between: (i) paying withholding tax as a result of the loan being outstanding long enough that subsection 15(2) and paragraph 214(3)(a) deem the loan to be a dividend subject to Canadian withholding tax and paying income tax on some section 17 deemed interest income, and (ii) paying income tax on a relatively high rate of deemed interest income under section 17.1.
Consider a non-resident corporation that controls a CRIC and that borrows $10,000,000 on January 1, 2013 from the CRIC with a December 31 year end and the loan is not repaid by December 31, 2014. If the CRIC and the non-resident parent do not elect for the loan to be PLOI, then:
- the CRIC has deemed interest income under subsection 17(1) at the basic prescribed rate (currently 1%), and
- the CRIC is deemed to have paid a $10,000,000 dividend to the non-resident parent on December 31, 2015, resulting in Canadian withholding tax of $500,000 (5%), $1,500,000 (15%) or $2,500,000 (25%), depending on whether a treaty reduced withholding tax rate applies.
If the CRIC and the non-resident corporation that controls the CRIC elect for the debt between them to be PLOI, then there is no Canadian withholding tax. Deemed interest income under section 17.1 starts January 1, 2013 at the regular prescribed rate (currently 1%) plus 4%.
It may seem that the PLOI rules provide a better result because there is no withholding tax. However, if the non-resident parent repays the loan after December 31, 2014, the withholding tax is refundable. The analysis should also consider whether the non-resident parent can claim a foreign tax credit against its domestic income tax liability for the Canadian withholding tax.
The subsection 15(2.11) PLOI exception applies to loans received and indebtedness incurred after March 28, 2012. Section 17.1 deemed income inclusion applies to taxation years and fiscal periods ending after March 28, 2012.