‘Upstream loans’ have long been a popular way for Canadian taxpayers to defer foreign withholding taxes and expedite corporate distributions from foreign affiliates. Recently enacted amendments to the Income Tax Act introduced new restrictions on the use of loans as a repatriation technique. The new rules reflect a significant policy change that will affect Canadian multinational corporations as well as foreign multinationals with Canadian subsidiaries and foreign affiliates.
Companies must focus on assessing the immediate effect of the rules, address any problems identified and develop policies and procedures for monitoring upstream loans.
In addition to an overview of the new upstream loan provisions, this article provides a framework for determining when they will apply, highlights inherent uncertainties in the legislation and offers suggestions for dealing with the new rules.