On March 25, 2022, the Canada Revenue Agency (the “CRA“) issued a notice to tax professionals outlining certain changes to “pertinent loan or indebtedness” (“PLOI“) elections, including PLOI elections made in respect of cross-border shareholder loans under subsection 15(2.11) of the Income Tax Act (the “ITA“).1 These changes apply to PLOI elections made on or after April 11, 2022.
Background on subsection 15(2.11) PLOI elections
Subsection 15(2) of the ITA provides that where a person or a partnership is:
- a shareholder of a corporation;
- connected with a shareholder of a corporation; or
- a member of a partnership or a beneficiary of a trust that is a shareholder of a corporation,
and the person or partnership has received a loan from or become indebted to the corporation, a related corporation or a partnership of which the corporation or a related corporation is a member, the amount of the loan or indebtedness is required to be included in the income of the person or partnership for Canadian income tax purposes, subject to certain exceptions.
Where subsection 15(2) of the ITA applies to a loan or indebtedness owing by a non-resident person, paragraph 214(3)(a) of the ITA deems the subsection 15(2) income inclusion to be a dividend from a Canadian resident corporation. As a result, the non-resident person is subject to Canadian withholding tax at a rate of 25% on the deemed dividend under subsection 212(2), subject to reduction under an applicable Canadian tax treaty.
The ITA provides several exceptions to subsection 15(2), including an exception for loans or indebtedness that are repaid within one year after the end of the taxation year of the lender in which the loan or indebtedness arose. In addition, subsection 15(2) of the ITA does not apply to loans or indebtedness owing by Canadian resident corporations or partnerships all of the members of which are Canadian resident corporations, or to loans or indebtedness that qualify as a PLOI under subsection 15(2.11) of the ITA.
A PLOI is defined in subsection 15(2.11) of the ITA as a loan or indebtedness that becomes owing after March 28, 2012 which meets the following requirements:
- the loan or indebtedness is incurred by a non-resident corporation (the “subject corporation“) or a partnership of which the subject corporation is a member;
- the loan or indebtedness is owing to either:
- a corporation resident in Canada that is controlled by the subject corporation, or another non-resident corporation that does not deal at arm's length with the subject corporation (the “CRIC“); or
- a partnership all of the partners of which are the CRIC and Canadian resident corporations related to the CRIC (the “Lender Partnership“);
- subsection 15(2) would otherwise apply to the loan or indebtedness; and
- a joint election is filed under paragraph 15(2.11)(d) of the ITA by the CRIC or all of the members of the Lender Partnership, as applicable, and the non-resident corporation that controls the CRIC.
Impact of a PLOI election
Where a PLOI election is made, subsection 15(2) of the ITA generally does not apply.2 As a result, the non-resident debtor will not be subject to Canadian withholding tax on the amount of the unpaid loan or indebtedness under subsection 15(2) and paragraph 214(3)(a) of the ITA. However, under subsection 17.1(1) of the ITA, the CRIC or the Lender Partnership, as applicable, will be deemed to earn interest income on the PLOI for each year that the PLOI is outstanding equal to the greater of:
- interest computed at a prescribed rate (currently 4.38%); and
- interest expense on any amount borrowed by the CRIC, the Lender Partnership or a Canadian resident person that did not deal at arm's length with the CRIC, which directly or indirectly funded the PLOI.
The deemed interest income under subsection 17.1(1) is reduced by the amount of actual interest included in the income of the CRIC or the Lender Partnership in respect of the PLOI.
As a result of the foregoing, while the non-resident debtor will generally not be subject to Canadian withholding tax on the unpaid loan or indebtedness under subsection 15(2) and paragraph 214(3)(a) of the ITA, the Canadian lender (whether the CRIC or the Lender Partnership) may have additional interest income which is subject to Canadian income tax.
March 2022 changes to PLOI elections
Prior to the March 25, 2022 changes, PLOI elections were required to include:
- the name and business number of the CRIC or the Lender Partnership;
- the name of the non-resident corporation that controlled the CRIC;
- the section of the ITA under which the PLOI election was made (i.e., subsection 15(2.11) or subsection 212.3(11));
- the name of the non-resident debtor; and
- the amount of the PLOI and the date the PLOI became owing.
In addition, PLOI elections were generally required to be made on a debt-by-debt basis, such that separate PLOI elections were required to be filed in respect of each loan or indebtedness, regardless of whether such amounts pertained to the same debt instrument (for e.g., revolving loans).
As a result of the March 25, 2022 changes, for PLOI elections made on or after April 11, 2022, the following additional information must be included:
- identification of the first taxation year in respect of which the PLOI election is made, the total amount initially owing and the currency in which the PLOI is denominated;
- the total changes in the amount of the PLOI on a monthly basis showing total increases (including capitalized interest) and total decreases;
- for revolving loans or other legal instruments where multiple amounts become owing, a copy of the loan agreement;
- the total amount of deemed interest on the PLOI, the total amount of interest actually charged on the PLOI and the net adjustment to interest income of the lender required; and
- a declaration regarding which of the two deemed interest rates apply to the PLOI under subsection 17.1(1).
In addition, only one PLOI election is required to be made in respect of multiple loans or indebtedness arising under a single legal instrument, provided that:
- a copy of the legal instrument is included with the PLOI election; and
- where multiple non-resident persons owe an amount under the terms of the legal instrument, a separate PLOI election is filed for each non-resident person.
The March 25, 2022 changes also provide penalty relief for late-filed PLOI elections in respect of multiple loans or indebtedness owing under a single legal instrument. In this case, only one late-filing penalty will apply. This penalty relief is available retroactively for taxation years that are not statute barred, and can be claimed by making a written request to the taxpayer's tax centre.
Whether a PLOI election should be made in respect of a particular cross-border shareholder loan requires an analysis of several factors, including a comparison of the tax cost of paying Canadian withholding tax on a subsection 15(2) income inclusion versus paying Canadian income tax on deemed interest income under subsection 17.1(1) of the ITA. Consideration should also be given to the terms of the loan, including whether the loan is interest-bearing, whether and when the loan will be repaid, and any foreign tax credits available to the non-resident debtor.
1 The changes also apply to PLOI elections made under subsection 212.3(11) of the ITA in respect of the foreign affiliate dumping rules. These rules are not discussed in this article.
2 Subject to the PLOI being deemed not to be a PLOI under subsection 17.1(3) of the ITA. In general, subsection 17.1(3) deems a loan or indebtedness not to be a PLOI where an applicable Canadian tax treaty limits the amount included in the CRIC's or the Lender Partnership's income in respect of the loan or indebtedness. Where a valid PLOI election is made, subsection 17(1) of the ITA should also not apply, but section 80.4 may apply.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.