A non-resident is taxable in Canada on gains realized on taxable Canadian property (TCP). TCP can potentially include shares of a corporation – whether resident or non-resident – if more than 50% of the fair market value of the shares was “derived directly or indirectly” from Canadian real property or Canadian resource interests. In 2015-0624511I7 (released June 14, 2017), the CRA provided confirmation of three positions relating to the former look-through rule in subparagraph (e)(ii) of the TCP definition in s. 248(1):
- Gross-asset-value method: The CRA confirmed its long-standing position that in determining what portion of a share’s value is derived from Canadian real property and Canadian resource interests, the gross value of the corporation’s assets should be used; that is, without taking into account its debt obligations (see page 7).
- Proportionate-value method: Where a lower-tier subsidiary (Subco) is involved, the CRA confirmed its view that the proportion of the total gross value of Subco’s assets comprising Canadian real property and Canadian resource interests should be applied to the value of Subco’s shares, and the resulting amount is considered Canadian real property and Canadian resource interests in the hands of Subco’s parent (Parent) (see page 10). (The CRA did not comment on the current wording of paragraph (d) of the TCP definition, which can exclude from consideration Subco shares that are not themselves TCP at the particular time.)
Intercompany loans: The CRA expanded on its 2012 position concerning intercompany loans in a corporate group. First, the CRA generally recharacterizes downstream loans from Parent to Subco as equity that increases the value of Subco’s shares (see page 11). Second, the CRA generally disregards as an asset of Subco any upstream loan from Subco to Parent. The Parent’s assets should reflect the substance of the upstream loan, and the value of Subco’s shares should be reduced accordingly (see page 12). Third, horizontal loans to a sister corporation are generally recognized as an asset in the lending corporation unless they are part of a back-to-back loan from the Parent (see page 13). To conclude, the CRA provided several examples and guiding principles (see pages 14 through 22) including a GAAR warning if debts are artificially created to achieve a favorable TCP result (see page 23).