The 2014 Canadian federal budget (Budget 2014) proposes to
introduce to the Income Tax Act (Canada) (ITA) new
anti-avoidance provisions regarding "back-to-back loans"
that, where applicable, may affect the deductibility of interest
and/or result in the imposition of Canadian withholding tax. These
proposals do not have immediate effect – generally, they are
proposed to apply after 2014.
The proposals are said to target financings provided to a
Canadian by a related non-resident via an intermediary in order to
avoid adverse consequences under the ITA that would otherwise arise
if the financing were provided directly. However, as drafted, the
proposals could also apply to a broader range of commercial
arrangements. In particular, the proposals should be considered in
the context of any cross-border financing transaction pursuant to
which a Canadian is obligated to pay interest to an
arm's-length party, and a non-arm's-length non-resident
pledges or posts security or collateral that secures such
obligation, some examples of which are noted below. It is by no
means clear that the application of the proposals in these examples
was intended, and the proposals may yet be amended prior to
enactment to more narrowly target specific forms of indirect
financing within corporate groups. Osler expects to engage with the
Department of Finance regarding more appropriate targeting of these
Cross-border group credit facilities.
A lender or lending syndicate will frequently negotiate a secured
loan or credit facility with a corporate group that includes a
Canadian and related non-residents. The Budget 2014 proposals may
raise issues as to interest deductibility and imposition of
Canadian withholding tax where a Canadian borrower pays interest on
a debt and a related non-resident pledges collateral that secures
the Canadian borrower's obligations.
Secured non-resident guarantees. The
Budget 2014 materials indicate that unsecured guarantees of
Canadian liabilities by a non-resident are not subject to the
proposals. However, arrangements involving secured guarantees would
Tri-party cross-border netting. These
proposals may apply elsewhere where credit and collateral are
contractually addressed on a group basis crossing the Canadian
border, such as account pooling or group netting provisions or
Parties currently negotiating or implementing such arrangements
will need to assess the materiality of the risk of uncertainty
introduced by these Budget 2014 proposals and ensure that such risk
is properly allocated under transactions concluded prior to any
clarification from the Department of Finance and introduction
(expected later this year) and passage of implementing
There is no grandfathering of existing transactions. Parties may
wish to see if any clarification is forthcoming from Finance. A
borrower considering any amendments in the near future may want to
conduct the analysis of this issue concurrent with such amendment.
In any event, given the effective date of the proposed changes, a
review of existing transactions will be appropriate in light of
implementing legislation, which is expected later in the year.
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