{"id":694,"date":"2013-06-03T15:18:33","date_gmt":"2013-06-03T15:18:33","guid":{"rendered":"https:\/\/thor.ca\/\/blog\/?p=694"},"modified":"2025-02-12T13:29:32","modified_gmt":"2025-02-12T21:29:32","slug":"cra-could-not-apply-s-956-to-foreign-affiliate-financing-structure","status":"publish","type":"post","link":"https:\/\/www.thor.ca\/blog\/2013\/06\/cra-could-not-apply-s-956-to-foreign-affiliate-financing-structure\/","title":{"rendered":"CRA could not apply s. 95(6) to foreign affiliate financing structure"},"content":{"rendered":"<p>In <a href=\"http:\/\/thor.ca\/blog\/wp-content\/uploads\/2013\/06\/2013-TCC-176.pdf\">Lehigh Cement Limited v. The Queen<\/a>, 2013 TCC 76, the Tax Court of Canada (Tax Court) held that the anti-avoidance rule in s. 95(6) could not apply to the acquisition of shares in a foreign affiliate financing structure \u2013 because (on the facts) there was no avoidance of Canadian tax \u201cthat would have otherwise been payable\u201d.  In brief, a Canadian company in the group (Canco) borrowed money and used the borrowed funds to subscribe for shares of a new US limited liability company (LLC).  The LLC used the share subscription funds to make an interest-bearing loan to a US company in the group (USCo).  USCo used the funds received to repay funds previously borrowed for its active business in the US.  USCo thereafter paid interest to the LLC, and the LLC paid dividends to Canco.  The structure was tax efficient because a net interest deduction was obtained in both Canada and in the US, essentially in respect of the same amount of borrowed money.  That is:<\/p>\n<ul>\n\u25cf\tUSCo deducted for US tax purposes the interest paid to the LLC (and remitted 10% US withholding tax);<\/ul>\n<ul>\n\u25cf\tThe LLC itself paid no US tax (it was ignored for US tax purposes);<\/ul>\n<ul>\n\u25cf\tThe interest income in the LLC was deemed to be \u201cactive business income\u201d and \u201cexempt surplus\u201d of the LLC for Canadian tax purposes (s. 95(2)(a)(ii)), meaning that no portion of the LLC\u2019s interest income could be attributed to Canco as \u201cforeign accrual property income\u201d (FAPI, s. 91);<\/ul>\n<ul>\n\u25cf\tDividends from the LLC were tax-free to Canco (s. 90 income inclusion, but offsetting s. 113(1)(a) deduction for dividends paid out of exempt surplus); and<\/ul>\n<ul>\n\u25cf\tCanco deducted under s. 20(1)(c) the interest it paid on the financing obtained to acquire shares of the LLC (Canco sheltered its other Canadian-source income with this interest deduction).<\/ul>\n<p>The Canada Revenue Agency (CRA) reassessed Canco under s. 95(6) to deny the tax-free treatment of dividends received from the LLC \u2013 on the grounds that Canco acquired the shares of the LLC for the principal purpose of avoiding Canadian tax that would have otherwise been payable.  The Tax Court held that the concept of Canadian tax \u201cthat would have otherwise been payable\u201d in s. 95(6) requires \u201ca comparison with an alternative arrangement\u2026that might reasonably have been carried out by the taxpayer\u201d (paragraphs 104 and 105).  On this point, the Tax Court found that the reasonable alternative arrangement would be one in which Canco used the borrowed funds to directly subscribe for shares of USCo.  This alternate arrangement would have produced exactly the same Canadian tax result for Canco.  Accordingly, the Tax Court held that no Canadian tax was avoided as a result of Canco acquiring the shares of the LLC (paragraph 108).  Although not necessary for its decision, the Tax Court went on to say that because Canco\u2019s Canadian tax savings (from in the interest expense) could have been obtained by directly investing in USCo shares instead, Canco\u2019s principal purpose for acquiring the LLC shares was to avoid US tax rather than Canadian tax (paragraph 109).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In <a href=\"http:\/\/thor.ca\/blog\/wp-content\/uploads\/2013\/06\/2013-TCC-176.pdf\">Lehigh Cement Limited v. The Queen<\/a>, 2013 TCC 76, the Tax Court of Canada (Tax Court) held that the anti-avoidance rule in s. 95(6) could not apply to the acquisition of shares in a foreign affiliate financing structure&hellip;<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-694","post","type-post","status-publish","format-standard","hentry","category-corporate-tax"],"_links":{"self":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/694","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/comments?post=694"}],"version-history":[{"count":1,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/694\/revisions"}],"predecessor-version":[{"id":2770,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/694\/revisions\/2770"}],"wp:attachment":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/media?parent=694"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/categories?post=694"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/tags?post=694"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}