“Loans to non-residents can cause income inclusions.”
Subsection 17(1) of the Income Tax Act (“Act”) is a commonly missed provision that generally applies when a corporation, resident in Canada, loans money to a non-resident person and such amounts are outstanding for more than a year. If the rate of interest on the amounts loaned to the non-resident is less than the prescribed rate of interest then subsection 17(1) will require an income inclusion for the Canadian corporation equal to the amount of the prescribed rate of interest that would have applied on the loan (less amounts included in the corporation’s income as interest in respect of the loan).
However, if the Canadian resident corporation loans money to a controlled foreign affiliate of the corporation and the controlled foreign affiliate uses the money throughout the period of the loan to earn income from an active business, then subsection 17(1)of the Act will not apply.
Accordingly, if a Canadian resident corporation is considering loaning money to a non-resident, then ensure that a suitable rate of interest is chosen to avoid the deemed income inclusion or ensure that the loan proceeds will be utilized by the non-resident controlled foreign affiliate throughout the loan period to earn income from an active business.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.