Letter to Canada's Department of Finance regarding subsection 17(8) of the Income Tax Act: March 9, 2006.

On March 9, 2006, TEI submitted a letter to Wallace Conway of the Canadian Department of Finance requesting the Department of Finance to consider developing a technical amendment to paragraph 17(8)(a) of the Income Tax Act of Canada. The letter follows up on an item discussed during the December 7, 2005 liaison meeting with the Department. TEI's letter was developed under the aegis of TEI's Canadian Income Tax Committee whose chair is David V. Daubaras of General Electric Canada. Contributing to the development of TEI's comments were Hugh D. Berwick of Alcan Inc. and Carmine A. Arcari of The Royal Bank of Canada.

During the December 7, 2005, liaison meeting between Tax Executives Institute and the Department of Finance, TEI queried whether the Department of Finance would consider introducing an amendment to the Income Tax Act to address a potential anomaly in the application of paragraph 17(8)(a) of the Act. The Department invited TEI to submit additional comments on its request for an amendment. On behalf of TEI, I am pleased to submit the following comments for your consideration.

Background

Tax Executives Institute is the preeminent global association of business tax executives. The Institute's 5,800 professionals manage the tax affairs of 2,800 of the leading companies in North America, Europe, and Asia and must contend daily with the planning and compliance aspects of Canada's business tax laws. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

During the TEI's liaison meeting of December 7, 2005, with the Department of Finance, the following question was posed:

There is a seeming anomaly in the application of paragraph 17(8)(a) of the Act in cases of indebtedness arising in connection with the acquisition by a controlled foreign affiliate (CFA) of the shares of another CFA where the acquired CFA shares constitute "excluded property." Assume that CANCO (a taxable Canadian corporation) makes an interest-free loan to wholly owned CFA1, and CFA1 uses the funds to acquire shares of CFA2 (which shares are "excluded property" of CFA1). Paragraph 17(8)(a) excludes the loan amount from the operation of section 17 if CFA1 uses the proceeds to earn active business income or to make a loan to another CFA that satisfies the conditions of subsection 95(2). Paragraph 17(8)(a) does not, however, exclude a loan where the proceeds are used to directly acquire...