Bona fide repayments should not be considered to be part of a series of loans or other transactions and repayments. In this situation, the underlying transactions that give rise to the fluctuation of the running loan balance play a key role in determining whether a series of loans or other transactions and repayments exists. Many Canadian taxpayers maintain a running loan account that contains all shareholder loan transactions arising from intercompany cash transfers, intercompany reimbursements for the expenses paid on behalf of each other, intercompany charges for goods and services, declaration of dividends and etc. The CRA takes a view that a repayment would generally be considered to be part of series of loans or other transactions and repayments where a non-resident shareholder makes a repayment shortly before the year-end and borrows the same amount, or substantially the same amount shortly thereafter in the immediately following year. It is a question of fact whether a repayment of a shareholder loan is considered to be part of a series of loans or other transactions and repayments. Trap - Series of loans or other transactions and repayments ![]() The withholding tax remitted on the benefit is not refundable in any event. The benefit will also be treated as a deemed dividend paid to the non-resident shareholder and therefore is subject to Canadian withholding tax. The benefit conferred on the non-resident shareholder is equal to the interest on the loan computed at the prescribed interest rate in excess of the amount of interest received in the year and within 30 days after the end of the year. The prescribed interest rate is currently at 2 per cent. The CRA announces the prescribed interest rate on a quarterly basis. Nonetheless, the non-resident shareholder will be deemed to have received a benefit from the Canadian subsidiary if the loan is non-interest bearing or the interest rate is less than the interest rate prescribed by the CRA. If the shareholder loan is repaid within one year after the end of the taxation year of the lender in which the loan was made, and the repayment is not considered to be part of a series of loans or other transactions and repayments, the loan will not be subject to the shareholder loan rules. The application for a refund must be submitted to the CRA within two years after the end of the year in which the shareholder loan is repaid. The shareholder loan will not be considered to have been repaid if the repayment is part of a series of loans or other transactions and repayments. The non-resident shareholder will be eligible to apply for a refund for the withholding tax paid on the deemed dividend when the shareholder loan is repaid. As such, a non-resident shareholder who received debt financing from its Canadian subsidiary will be taxed in the same manner as if it had received a dividend from the subsidiary. The deemed dividend can be subject to Canadian withholding tax at 25 per cent or reduced pursuant to applicable tax treaties. ![]() When the shareholder loan rules apply, the debt financing provided to the non-residents will be deemed to be a dividend paid to the non-residents. ![]() There are certain exceptions to the rules, which we will explain below. In a cross-border setting, the shareholder loan rules very broadly apply when a Canadian-resident corporation provides debt financing to its non-resident shareholders or any other non-resident persons who do not deal at arm’s length with the non-resident shareholders. This article is the first of a series on cross-border debt financing arrangements and focuses on shareholder loans in the Canadian inbound investment context. However, certain Canadian tax rules could easily be overlooked, which may result in unintended adverse tax consequences. Debt financing is commonly used in cross-border transactions due to the relative ease of implementation and the concurrent tax efficiencies.
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