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Canada: Important Deadline Approaching under Canada’s “upstream loan” Rules

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Ian Caines

August 19 2016 will be an important deadline under Canada's "upstream loan" rules for foreign affiliates. After that date, the rules will begin to apply to certain historical intra-group indebtedness that was previously exempt due to a limited period of transitional relief.

Affected taxpayers may need to unwind historical arrangements, or otherwise reorganise their affairs, by the deadline in order to avoid adverse Canadian tax consequences.

The upstream loan rules are applicable in certain cases where a person (the debtor), receives a loan from, or otherwise becomes indebted to, a foreign affiliate of a Canadian resident and the debt is not repaid within two years. Generally speaking, these new rules apply in certain cases where the debtor is either the Canadian resident itself or another person not dealing at arm's-length with the Canadian resident (such as a Canadian or foreign parent of the Canadian resident, a subsidiary, or a sibling company in its corporate group). Where the rules apply to debt, the result is to include some or all of the amount of the debt in the income of the Canadian resident.

These rules generally apply to all debt, including debts incurred before the rules were enacted. However, special transitional relief provides that debt originally incurred by August 19 2011 is deemed to have been incurred on August 20 2014. As a result, the two-year threshold for such historical debt will be satisfied on August 20 2016, potentially resulting in a (retroactive) income inclusion and tax liability for the Canadian resident's 2014 taxation year.

There is also a transitional foreign exchange set-off rule that will, in certain circumstances, allow foreign exchange gains (or losses) realised on repayment of the debt to be set-off against foreign exchange losses (or gains) of the foreign affiliate resulting from such repayment. Such transitional foreign exchange set-off rule will also only apply if the loan in question is repaid on or before August 19 2016.

The consequences of the upstream loan rules may be avoided by repaying the relevant debt before the deadline, or by certain other means depending on the taxpayer's circumstances. Taxpayers potentially affected by these rules should consult with their tax advisers regarding any appropriate steps to be taken before the deadline.

Ian Caines (ian.caines@blakes.com)

Blake, Cassels & Graydon

Tel: +1 416 863 5277

Website: www.blakes.com

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