canadian tax journal / revue fiscale canadienne (2013) 61:2, 367 - 85
The Modern Approach to Statutory
Interpretation, Applied to the Section 15
Anomaly in Foreign Affiliate Financing
Randy S. Morphy*
Précis
Dans cet article, l’auteur relève une opération de prêt courante entre sociétés étrangères
affiliées qui peut donner lieu à une application anormale des dispositions en matière de
prêts aux actionnaires si ces dispositions sont lues et appliquées littéralement. Il fait par
la suite un bref examen de l’approche moderne relative à l’interprétation législative et
applique cette approche aux paragraphes 15(2) et (2.3), afin de tenter de faire concorder
le texte avec le contexte et l’objet, et en arriver ainsi à une conclusion raisonnable.
L’auteur espère que le cadre en vertu duquel l’approche moderne est comprise et
appliquée dans le contexte de l’opération de prêt peut être instructif dans d’autres cas
où une lecture textuelle des dispositions pertinentes donne lieu à un résultat anormal.
Abstract
In this article, the author identifies a common foreign affiliate loan transaction that may
give rise to an anomalous application of the shareholder loan provisions if those
provisions are read and applied literally. He then provides a brief review of the modern
approach to statutory interpretation and applies that approach to subsections 15(2) and
(2.3), in an attempt to reconcile text with context and purpose, and thus arrive at a
sensible conclusion. It is the author’s hope that the framework under which the modern
approach is understood and applied in the context of the loan transaction may be
instructive in other instances where a textual reading of the relevant provisions gives rise
to an anomalous result.
Keywords: Shareholders n benefits n foreign affiliates n loans n lending n statutory
interpretation
* Of Borden Ladner Gervais LLP, Vancouver (e-mail: [email protected]). The author wishes to
thank Jacqueline Fehr and Dan Palmer, both former articled students, for their assistance in
the preparation of this article.
 367
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(2013) 61:2
Contents
Introduction
Foreign Affiliate Financing Examples
Application of Subsection 15(2): A Preliminary Reading
Subsection 15(2)
Subsection 15(2.3) Exception
Remaining Exceptions
Consequences of Subsection 15(2)
Application of Subsection 15(2): A Reading Under the Modern Approach
to Statutory Interpretation
The Modern Approach to Statutory Interpretation
Textual Reading of Subsection 15(2)
Contextual and Purposive Reading of Subsection 15(2)
A Unified Interpretation of Subsection 15(2)
Application of Subsection 15(2.3): A Reading Under the Modern Approach
to Statutory Interpretation
Textual Reading of Subsection 15(2.3)
Contextual and Purposive Reading of Subsection 15(2.3)
A Unified Interpretation of Subsection 15(2.3)
Conclusion
368
369
371
371
372
373
373
374
375
376
376
379
380
380
383
385
385
Introduc tion
Interest-free loans between related parties present a difficult challenge for tax policy
makers. On the one hand, these loans can be used to produce an indefinite deferral
or avoidance of tax payable that is inappropriate at a policy level. In these cases,
there is a clear need for rules designed to remove the incentive to engage in such
planning. On the other hand, interest-free loans are often used by corporate groups
for legitimate commercial reasons and in many cases will not produce inappropriate
tax results. In these cases, tax policy makers should be careful not to unduly restrict
bona fide commercial transactions. To achieve both policy objectives, the antiavoidance rules applicable to interest-free loans must be nuanced in their application
and must be integrated and operate harmoniously with one another.
The Income Tax Act1 contains a number of provisions applicable to interest-free
loans between related parties. There is a scheme in sections 15 and 80.4 that, in
general terms, seeks to prevent Canadian corporations from making interest-free
loans to shareholders in lieu of paying taxable dividends. There is also a scheme in
section 17 that, in general terms, seeks to prevent Canadian residents from making
interest-free loans to non-residents in cases where the loan proceeds are used to
earn investment income that may not be taxed in Canada as it accrues. However, the
former scheme is not limited to shareholder loans and the latter is not limited to loans
1 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless otherwise
stated, statutory references in this article are to the Act.
the modern approach to statutory interpretation  n  369
to non-residents. The transfer-pricing rules in section 246 may also apply to interestfree loans.
For the most part, the two schemes work well in isolation when viewed in terms
of their primary objective. That is, sections 15 and 80.4 generally apply only when
and to the extent that a shareholder loan gives rise to an economic benefit that
ought to be taxed as a dividend, and section 17 will not apply in many situations
where the loan proceeds are used in an active business. In most circumstances, these
schemes also operate harmoniously with one another such that a particular transaction will be governed by one scheme or the other, but not both; however, as has
been pointed out by other commentators, that is not always the case.2 When such
overlap occurs, the modern rule of statutory interpretation may assist by allowing
a more narrow reading of a provision, having regard to its place in the overall
scheme governing interest-free loans between related parties. The modern rule
may, of course, also assist in resolving technical deficiencies that do not arise as a
result of overlapping schemes, but nonetheless produce an anomalous result where
a particular provision is read and applied literally.
This article considers a common foreign affiliate loan transaction subject to
overlapping schemes that may give rise to an anomalous application of the shareholder loan provisions if those provisions are read and applied literally. The modern
approach to statutory interpretation is then summarized and applied to the relevant
provisions in an attempt to reconcile text with context and purpose, in order to arrive at a sensible conclusion. It is the author’s hope that the framework under which
the modern approach is understood and applied in the context of the loan transaction may be instructive in other instances where a textual reading gives rise to an
anomalous result.
F o r e i g n A ff i l i at e F i n a n c i n g E x a m p l e s
Figure 1 illustrates two simple financing arrangements for a foreign affiliate of a
Canadian corporation.
In example 1, a Canadian parent (“Canco”) makes an interest-free loan (“the loan”)
to a wholly owned foreign subsidiary (“Forco”), which uses the loan for the purpose
of earning income from an active business. Under this arrangement, a deemed income inclusion under subsection 17(1) would be avoided as a result of the exception
in paragraph 17(8)(a), which in general terms provides that subsection 17(1) will not
apply in respect of an interest-free loan advanced to a controlled foreign affiliate
where the proceeds of the loan are used for the purpose of earning income from an
active business. Similarly, the arrangement should not give rise to an income inclusion
2 The overlap of section 17 with section 15 (and with certain aspects of the foreign accrual
property income regime) was discussed in Richard Tremblay and Scott Wilkie, “The Canadian
Triangle: Tax Policy Reflections on the Uneasy Interaction of Subsection 15(2), Section 17, and
Subsection 95(2),” in Report of Proceedings of the Fifty-Fourth Tax Conference, 2002 Conference
Report (Toronto: Canadian Tax Foundation, 2003), 18:1-17.
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(2013) 61:2
under the shareholder loan provisions in subsection 15(2) because Forco is not a
shareholder of Canco, either directly 3 or through a partnership or trust,4 and (pursuant to subsection 15(2.1), discussed below) Forco is not connected with a shareholder
of Canco.
When considering the arrangement in example 1 in policy terms, it seems reasonable to infer from subsection 17(1) that, as a starting point, Parliament did not
wish to allow interest-free financing of foreign subsidiaries. However, subsection
17(8) suggests that, as an exception to that general rule, Parliament did intend to
allow interest-free financing of foreign subsidiaries that carry on an active business. This active business exception is longstanding and was formerly set out in
subsection 17(3).
Similarly, one might infer from the existence of subsection 15(2.1) (which provides
that a foreign affiliate is not “connected” to any person in its corporate group) and
subsection 15(2.2) (which provides that subsection 15(2) does not apply to indebtedness between non-resident persons) that Parliament did not intend subsection 15(2)
to apply to loans from a Canadian parent to a foreign subsidiary or loans between
foreign subsidiaries, at least in certain circumstances. The fact that Parliament has
enacted a series of detailed rules in section 17 dealing with interest-free loans from
a Canadian parent to a foreign subsidiary would seem to suggest that, at the very
least, section 17 would be the primary means of governing these arrangements. In
contrast, the shareholder loan provisions in section 15 would be the primary means
of governing loans from a Canadian corporation to a foreign parent5 or to an individual shareholder. With that in mind, the result that no adverse tax consequences
arise under the financing arrangement depicted in example 1 seems sensible from a
policy perspective.
Should the result change for the arrangement depicted in example 2, where Forco
holds all of the shares of another active or inactive foreign subsidiary (“Subco”) but
still carries on an active business in respect of which the loan proceeds are used?
Subsection 17(8) would continue to apply in this example, such that no imputed
income would arise under subsection 17(1) provided that the loan proceeds are used
in an active business. However, a similar result may not arise under subsection 15(2).
3 Paragraph 15(2)(a).
4 Paragraph 15(2)(b).
5 Greg Boehmer, Kathleen Hanly, and Eric Xiao, “Insolvency: Selected Income Tax Issues
Relating to Debt Restructuring and Liquidation,” in Report of Proceedings of the Sixty-First Tax
Conference, 2009 Conference Report (Toronto: Canadian Tax Foundation, 2010), 7:1-40, at
7:24-25.
the modern approach to statutory interpretation  n  371
FIGURE 1 Financing of a Foreign Affiliate Through an Interest-Free Loan
Example 1
Example 2
Canco
Canco
Canada
Canada
Foreign jurisdiction
Foreign jurisdiction
Loan
Loan
Forco
Forco
Subco
A pp l i c at i o n o f S u b s e c t i o n 15 (2) :
A Preliminary Re ading
Subsection 15(2)
Subsection 15(2) is the operative provision giving rise to an income inclusion for
certain shareholder loans. The relevant portions of subsection 15(2) read as follows:
15(2) Where a person (other than a corporation resident in Canada) . . . is
(a) a shareholder of a particular corporation, [or]
(b) connected with a shareholder of a particular corporation . . .
and the person . . . has in a taxation year received a loan from . . . the particular corporation [or] any other corporation related to the particular corporation . . . the amount
of the loan . . . is included in computing the income for the year of the person.
The “person” to focus on in example 2 is Forco. Forco is not a corporation resident in Canada and has received a loan from Canco. Forco is a shareholder of a
“particular corporation,” Subco, and is indebted to a person, Canco, to which Subco
is related by virtue of the fact that Canco controls Subco.6 It is worth noting that
the result would not change if the loan bore interest at market rate.
If Subco is liquidated, the problem disappears because Forco is no longer a
shareholder of a corporation. But the Act applies to the facts as they are, not as they
might be.7 As an aside, it is interesting to note that the domestic interest imputation
6 Paragraphs 251(2)(b) and 256(6.1)(a).
7Shell Canada Ltd. v. Canada, [1999] 3 SCR 622, at paragraph 45.
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provisions in subsection 80.4(2) would likely not apply in this scenario because of a
slight difference between the two charging provisions.8
Subsection 15(2.3) Exception
Subsection 15(2.3) provides an exemption from subsection 15(2) that could potentially be applicable in example 2. Subsection 15(2.3) provides that subsection 15(2)
will not apply to
a debt that arose in the ordinary course of the creditor’s business or a loan made in the
ordinary course of the lender’s ordinary business of lending money where, at the time
the indebtedness arose or the loan was made, bona fide arrangements were made for
repayment of the debt or loan within a reasonable time.
The word “or” should be given its presumed disjunctive reading;9 accordingly, the
financing arrangement in example 2 should qualify for this exemption if it meets
either of the two exceptions specified above. For the purposes of the analysis that
follows, it is assumed that bona fide arrangements have been made. It should, however, be noted that a demand loan will generally not satisfy this requirement.10
With respect to the first exception, the Canada Revenue Agency (cra) is of the
view that the term “debt” does not include a loan.11 This view is based on a contextual reading that concludes that if “debt” includes a loan in the first exception,
then the second exception is rendered meaningless because any arrangement that
falls under the first exception will also fall under the second. This interpretation is
discussed in more detail below. For the time being, it is sufficient to conclude that
if the cra’s position is correct, then the loan cannot qualify under the first exception
in subsection 15(2.3).
With respect to the second exception, it is unlikely that Canco would be viewed as
carrying on the “business of lending money” in respect of the loan. The jurisprudence
8 The relevant provisions of subsection 80.4 read as follows:
(2) Where a person (other than a corporation resident in Canada) . . . was
(a) a shareholder of a corporation . . .
and by virtue of that shareholding that person . . . received a loan from . . . that corporation
[or] any other corporation related thereto . . . the person shall be deemed to have
received a benefit in a taxation year [emphasis added].
The material difference between subsections 15(2) and 80.4(2) is emphasized above: under
subsection 80.4(2), the loan must be received by the person (Forco in example 2) by virtue of
its shareholdings in a corporation (Subco). In example 2, receipt of the loan by Forco has
nothing to do with the fact that Forco is a shareholder of Subco—Forco has received the loan
because it is a subsidiary of Canco, and it would have received the loan whether or not Subco
had been incorporated.
9 Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham, ON: Butterworths
Canada, 2008), at 81.
10 Perlingieri v. MNR, 93 DTC 158 (TCC).
11 CRA document no. 2004-0064811E5, February 8, 2006.
the modern approach to statutory interpretation  n  373
relating to this phrase is discussed in more detail below; however, it should be noted
here that there are a number of factors that would make it difficult for Canco to rely
on the second exception.
Remaining Exceptions
Subsection 15(2.1) provides that for the purposes of subsection 15(2), a person is
not considered to be “connected” with a shareholder of a particular corporation if
that person is a foreign affiliate either of that corporation or of a person resident
in Canada that does not deal at arm’s length with that corporation. This exception
is of assistance only where the loan is brought within the charging provision of subsection 15(2) by paragraph 15(2)(b). In example 2, the loan is brought within the
charging provision of subsection 15(2) by paragraph 15(2)(a), because Forco is itself
“a shareholder of a particular corporation”; therefore, the exception in subsection
15(2.1) is of no assistance.
The remaining exceptions to subsection 15(2) contained in subsections 15(2.2)
and (2.4) through (2.6)—none of which are applicable to the loan in example 2—are
as follows:
n
n
n
Subsection 15(2.2) exempts indebtedness between non-residents. In example 2,
the lender is Canco.
Subsections 15(2.4) and (2.5) deal with loans that arise in respect of employees
and trusts, respectively.
Subsection 15(2.6) exempts loans that are repaid within one year of the end
of the taxation year in which the loan was made where it is established that
the repayment was not part of a series of loans or other transactions and repayments. On its face, this exception might apply in example 2; however, for
discussion purposes, it is assumed that Forco will require financing for a
longer period.
In sum, it seems that the loan in example 2 would be subject to subsection 15(2)
if the cra’s interpretation of subsection 15(2.3) is correct.
Consequences of Subsection 15(2)
Where subsection 15(2) applies in respect of a loan, the amount of the loan is included in computing the income for the year of the recipient of the loan, which is
Forco in example 2. Paragraph 214(3)(a) then provides that
(a) where section 15 . . . would, if Part i were applicable, require an amount to be
included in computing a taxpayer’s income, that amount shall be deemed to have been
paid to the taxpayer as a dividend from a corporation resident in Canada.
In example 2, the identity of the “corporation resident in Canada” that is deemed
to have paid the dividend referred to in paragraph 214(3)(a) is not obvious. It is relevant because the dividend payer would be required to withhold and remit part xiii
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tax on this deemed dividend because of the combined effect of subsections 212(2)
and 215(1).
The dividend payer for these purposes was identified in Florsheim Inc. v. The
Queen,12 where the court held that it is logical to conclude that the entity that made
the loan is the one that is deemed to have paid the dividend described in paragraph 214(3)(a). In Florsheim, the Canadian taxpayer made an interest-free loan to
its non-resident parent corporation. A benefit arose in respect of the loan under
subsections 80.4(2) and 15(9), and the taxpayer was in turn deemed to have paid a
dividend to the loan recipient. Although the loan recipient happened to be a shareholder of the taxpayer, it is clear from the decision that the result would have been
the same—that is, the taxpayer would have been required to withhold on the dividend deemed to have been paid to the loan recipient—even if the underlying loan
had been made to a person other than a direct shareholder, such as a grandparent
corporation. The cra has similarly concluded that it is the lender that must withhold where subsection 15(2) applies in respect of a loan made to a non-resident.13
It follows that for the purposes of part xiii, a Canadian corporation can be
deemed to have paid a dividend to a person that does not hold shares in the Canadian
corporation. This will typically be the case, for example, where a dividend is deemed
to have been paid under section 212.1 by a Canadian-resident corporation to a nonresident vendor of shares. In Placements Serco Ltée v. The Queen,14 the Federal Court
of Appeal considered this very scenario and upheld a Federal Court ruling that a
deemed dividend that is subject to part xiii withholding tax may arise even in the
absence of shareholdings.
Therefore, in example 2, it appears that as a result of the loan, Canco would be
deemed to have paid a dividend to Forco, notwithstanding that Forco is not a shareholder of Canco.
A pp l i c at i o n o f S u b s e c t i o n 15 (2) :
A R e a d i n g U n d e r t h e M o d e r n A pp r o a c h
t o S tat u t o r y I n t e r p r e tat i o n
For a number of years, the doctrine of strict construction was the dominant approach
to the interpretation and application of the Act. Under this approach, the words of the
Act are read literally and applied mechanically. The decline of the doctrine of strict
construction and the emergence of the modern rule of statutory interpretation has
been well canvassed elsewhere.15 For the purposes of this discussion, it is sufficient
12 95 DTC 110 (TCC).
13 CRA document no. 2003-0047891E5, January 23, 2004.
14 84 DTC 6098 (FCTD); aff ’d. 88 DTC 6125 (FCA).
15 See, in particular, David G. Duff, “Interpreting the Income Tax Act—Part 1: Interpretive
Doctrines” (1999) 47:3 Canadian Tax Journal 464-533; and Brian Bloom and Brandon Wiener,
“Has Parliament Failed To Charge the ‘Tax on SIFT Partnerships’?” (2011) 59:1 Canadian Tax
Journal 1-23.
the modern approach to statutory interpretation  n  375
to note that the strict construction doctrine has been replaced with the modern approach to statutory interpretation under which it is necessary to look beyond the
literal meaning of the words of the legislation.
The Modern Approach to Statutory Interpretation
The modern approach to statutory interpretation is founded on the modern rule of
statutory interpretation, which states, “[T]he words of an Act are to be read in their
entire context and in their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act, and the intention of Parliament”16 (referred
to as “the modern rule”). On a number of occasions in recent years, the Supreme
Court of Canada has provided guidance on the application of the modern rule in
the context of the Act. The interpretation and application of subsection 15(2) must
be considered in light of this guidance, which may be summarized as follows:
n
n
n
Under the modern rule, all legislation is to be given a textual, contextual, and
purposive reading. The Income Tax Act is no exception.17 However, the degree of precision and detail found in the provisions of the Act suggests that a
textual reading should normally be emphasized.18 Nevertheless, context and
purpose must always be considered and, when considered, may reveal latent
ambiguities that are not apparent on a purely textual reading of a provision.19
Where the words of a provision are precise and unequivocal, those words will
play a dominant role in the interpretive process.20 Where a provision admits
of no ambiguity in its meaning or in its application to the facts, it must simply be
applied.21
On the other hand, where a provision admits of more than one reasonable
interpretation, including where a contextual and purposive analysis reveals a
latent ambiguity,22 the emphasis on the text is reduced and context and purpose are afforded a larger role in the interpretation.23
16 Stubart Investments Ltd. v. The Queen, [1984] 1 SCR 536, at 578, quoting Elmer A. Driedger,
Construction of Statutes, 2d ed. (Toronto: Butterworths, 1983), at 87.
17 Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, at paragraph 10; and Placer Dome Canada
Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, at paragraph 21.
18 Canada Trustco, supra note 17, at paragraph 11; and Placer Dome, supra note 17, at paragraph 21.
19 Canada Trustco, supra note 17, at paragraph 47; and Placer Dome, supra note 17, at paragraph 22.
20 Canada Trustco, supra note 17, at paragraph 10; and Ludco Enterprises Ltd. v. Canada, 2001 SCC
62, at paragraph 38, citing Shell Canada, supra note 7, at paragraph 43.
21 Placer Dome, supra note 17, at paragraph 23. A clearly worded provision would presumably
admit of no ambiguity in its application to the facts where context and purpose are not
inconsistent with text.
22 Canada Trustco, supra note 17, at paragraph 47.
23 Placer Dome, supra note 17, at paragraph 22.
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Under the approach mandated by the Supreme Court, it is necessary to consider
the context and purpose of a provision even where at first blush the words of that provision are perfectly clear. This is so, first, because the text of a clearly worded provision
is to be emphasized (but not to the exclusion of all else), and second, because one
cannot determine whether there is a latent ambiguity in a clearly worded provision
without considering the context and purpose of that provision.24 What is required is
to read the text of a provision, consider its context and purpose, and then, with context and purpose in mind, read the text a second time in search of latent ambiguities
revealed by context and purpose. If the text reveals no ambiguity (latent or otherwise) on either reading, then it will be strongly emphasized. Otherwise, emphasis
will shift to context and purpose. In either case, the provision would then, to the
extent possible, be given a meaning that is harmonious with the Act as a whole.
Therefore, before one can conclude that the loan in example 2 will give rise to a
deemed dividend, it is necessary to interpret the provisions that would be primarily
responsible for such a result—subsections 15(2) and 15(2.3)—under the modern
approach to statutory interpretation.
Textual Reading of Subsection 15(2)
For the reasons noted above, the loan in example 2 would, on a purely textual reading, fall squarely within the charging provisions of subsection 15(2), which on a first
reading do not appear ambiguous. Moreover, a textual reading would be expected
to play a dominant role in the application of subsection 15(2) because of the level of
detail and apparent lack of ambiguity in its wording. That said, a contextual and
purposive reading of subsection 15(2) must still be undertaken, in part to identify
any latent ambiguities in the text itself or in its application to the facts at hand.
Contextual and Purposive Reading of Subsection 15(2)
A contextual reading involves an analysis of other relevant provisions in the Act.
Relevant provisions in this context are ones that are grouped together with the provision in question, or that work together with the provision in question to give effect
to a plausible or coherent plan.25 A contextual inquiry might focus on immediately
surrounding provisions, provisions that might apply on a small change in their
wording or in the facts, provisions dealing with similar subject matter or similar
problems, or provisions from which an instructive analogy might be drawn.26
24 By way of illustration, in Canada 3000 Inc., Re; Inter-Canadian 1991 Inc. ( Trustee of ), 2006 SCC
24, at paragraph 45, the court held that it was necessary to “suspend judgment on the precise
scope” of the provision in question in order to “examine the contextual elements” of the
modern rule of interpretation.
25 Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, at paragraph 91.
26 Douglas J. Powrie, “GAAR: A Planner’s Perspective,” in Report of Proceedings of the Sixty-Second
Tax Conference, 2010 Conference Report (Toronto: Canadian Tax Foundation, 2011), 8:1-32.
The author of the present article wishes to specifically acknowledge Powrie’s comments on
the modern approach to statutory interpretation  n  377
A purposive reading involves an attempt to determine the outcome that the provision in question was intended to achieve or, in the case of an anti-abuse rule,
prevent. The intended outcome can be inferred by understanding the purpose of
the particular provision and the factual circumstances in which it is being applied.27
In some cases, explanatory notes will provide some guidance on purpose, but for the
most part, purpose must be determined by making logical inferences based on text
(the wording of a provision) and context (the function of a provision in a particular
scheme within the Act). Also, where a provision gives rise to adverse tax consequences, it may be possible to identify the result that Parliament sought to avoid
when enacting the provision by considering the natural result, in terms of taxpayer
behaviour, that would arise in the absence of the provision.
Context and purpose are intertwined; for example, the purpose of a provision
must be considered in order to determine which other provisions are analogous or
related to it for the purposes of a contextual analysis.28 In each case, extrinsic materials may be considered where appropriate.
The two provisions that follow subsection 15(2)—subsections 15(2.1) and (2.2)—
provide immediate context to subsection 15(2). As discussed above, subsection 15(2.1)
provides that for the purposes of subsection 15(2), a person is not connected with a
shareholder of a particular corporation if the person is a foreign affiliate of that corporation.29 This provision will prevent the application of subsection 15(2) to a large
number of foreign affiliate loans but does not assist Canco in example 2, where the
application of subsection 15(2) turns on paragraph 15(2)(a) rather than paragraph
15(2)(b). Subsection 15(2.2) also does not apply because it provides an exception
only for loans between foreign affiliates.
The immediate context of subsection 15(2) reveals that some effort has been
made to prevent the application of subsection 15(2) where the loan recipient is a
foreign affiliate. Indeed, the relieving rules are effective in example 1 and would be
effective in example 2 but for the fact that Forco controls Subco. Where two comparable transactions fall on opposite sides of a bright-line test, it might be inferred
that a principled policy decision has been made to treat the transactions differently,
or it may be inferred that the result in one of the transactions was an unforeseen
anomaly. In example 2, the latter is probably true because there is no reason in policy
why the application of subsection 15(2) should turn on whether Forco happens to
control another corporation that may or may not be active.
contextual and purposive analysis in the context of the general anti-avoidance rule. Those
comments were of great assistance and influence in developing the analysis and conclusions
presented in this article.
27 Ibid.
28 Mathew v. Canada, 2005 SCC 55, at paragraph 43.
29 Or of a person resident in Canada that does not deal at arm’s length with the particular
corporation.
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In a more general context, subsection 15(2) is part of section 15, which was described in a 1997 explanatory note as a section that “requires the inclusion in income
of certain benefits received or enjoyed by a shareholder of a corporation,”30 and is
informally referred to in the tax community as “the shareholder benefit provision.”
The loan in example 2 is a benefit to Forco, but that benefit is not derived from
Forco’s status as a shareholder. Section 15 as a whole focuses on direct or indirect
benefits conferred by a Canadian corporation on its shareholders. In that context,
the application of subsection 15(2) to the loan in example 2 is anomalous. There is
no obvious benefit to any of Canco’s shareholders arising from the loan.
In a broader context, one must take note of section 17 and subsection 247(7).
Section 17 is a detailed and extensive codification of the circumstances under which
a Canadian-resident corporation is and is not permitted (without adverse tax consequences) to make a zero- or low-interest loan to a foreign subsidiary. Subsection
247(7) provides an exemption from the transfer-pricing rules where a loan qualifies
for an exemption from section 17 under subsection 17(8) (that is, in general terms,
where the loan proceeds are used in an active business) and serves as further evidence of a broad policy to promote liquidity for Canadian corporations with foreign
affiliates engaged in active business by permitting the use of debt in lieu of equity
for intragroup financing.31 But for the transfer-pricing exemption, an exemption
from section 17 would be of little practical benefit. Similarly, avoiding the application
of section 17 to a particular loan by relying on an exception (or even by charging
the prescribed rate of interest) would be of no practical benefit if subsection 15(2)
applies. It is difficult to imagine that Parliament intentionally set out to create a
scheme that provides an exemption from sections 17 and 247 and yet at the same
time includes the entire principal amount of the loan in Forco’s income if—but only
if—Forco happens to control another corporation. Such a scheme would be at odds
with the general presumption of “harmony, coherence, and consistency” in legislation dealing with a particular subject matter.32
The purpose of subsection 15(2) is to remove the incentive for Canadian corporations to make shareholder loans in lieu of paying dividends that would be “taxable”
in an economic sense. This purpose can be inferred by considering, in general
terms, the types of loans to which subsection 15(2) does and does not apply. It does
not apply to loans made to a Canadian corporation or between foreign affiliates of
a Canadian corporation, because any dividends paid in lieu would generally be deductible under section 112 or would be non-taxable. In many cases, it will not apply
to loans made to foreign affiliates, because dividends are generally not paid to foreign affiliates. Finally, it generally does not apply to short-term loans, presumably
30 Canada, Department of Finance, Explanatory Notes Relating to Income Tax (Ottawa: Department
of Finance, December 1997), at clause 75.
31 Brian Bloom, “A Policy of Disengagement: How Subsection 247(2) Relates to the Act’s Income
Modifying Rules,” Tax Topics no. 1957, September 10, 2009, 1-4.
32 R v. Ulybel Enterprises Ltd., 2001 SCC 56, at paragraph 52.
the modern approach to statutory interpretation  n  379
because such loans are not sufficiently equivalent to a dividend in economic terms.
Conversely, subsection 15(2) clearly applies to loans made to individual and nonresident shareholders. This is the expected result, given that dividends paid in lieu
would be taxable under part i or part xiii. Collectively, these provisions serve to
identify the result that Parliament sought to avoid when enacting subsection 15(2).
The provisions related to subsection 15(2)—in particular, subsections 17(1) and
(8) and 247(7)—have a clear purpose, which is to remove the economic incentive for
Canadian corporations to make interest-free loans to foreign subsidiaries except in
certain situations, including where the loan proceeds are used by a foreign affiliate
in an active business. If that is the purpose of the related provisions, we can perhaps
infer that subsection 15(2) should not be read in a manner that makes it economically
impossible to enter into a transaction that is clearly permitted by another provision.
In other words, the harmonious reading of subsection 15(2) may be one that does
not frustrate the purpose of another related provision, namely, section 17.
A Unified Interpretation of Subsection 15(2)
On a plain reading, the text of subsection 15(2) applies to the loan in example 2.
However, the context and purpose of subsection 15(2) indicate that it should not be
interpreted to produce that result. Where the text is not ambiguous, it is to be emphasized. Not applied mechanically, but emphasized. Where the text is ambiguous,
context and purpose are to be emphasized. The emphasis in this case will depend on
whether a contextual and purposive analysis reveals a latent ambiguity in the text of
subsection 15(2) as it applies to the loan in example 2. In other words, when the text
is examined a second time having regard to the conclusions reached on its context and
purpose, are the words as clear as they first seemed? This second reading is particularly important where an initial textual reading of a provision produces a result that
appears to be unintended.
A provision is ambiguous where it is “reasonably capable of more than one meaning,” keeping in mind that “one must consider the entire context of a provision before
one can determine if it is reasonably capable of multiple interpretations.”33 For example, in Canada 3000,34 the Supreme Court of Canada held that the term “owner”
when used in relation to a particular aircraft does not, when interpreted with regard
to the context and purpose of the relevant provisions, include the legal and registered
owner of that aircraft. Thus, even a well-understood commercial term may reasonably support more than one meaning, depending on the circumstances. At the same
time, readers must not search for ambiguity as means to reverse-engineer the outcome that is thought to be correct on a policy level.
A second reading of subsection 15(2) might focus on the portion of the charging
provision that requires Forco to be a shareholder of a “particular corporation.” On
33 Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, citing Westminster Bank Ltd. v. Zang,
[1966] AC 182, at 222 (HL), per Lord Reid.
34 Supra note 24.
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(2013) 61:2
a first reading, the identity of the particular corporation is not restricted and should
be read to include any corporation in which Forco holds shares, Holdco included.
A textual and contextual reading, however, would raise questions as to whether this
phrase was truly intended to refer to any corporation in the entire world, or whether
it should be read more narrowly as a reference to a corporation that is relevant to the
loan at issue. This type of narrow interpretation of a broadly worded term or phrase
is not uncommon. For example, in Oceanspan Carriers Limited v. The Queen,35 the
Federal Court of Appeal interpreted the term “taxpayer”—which is defined to include
any person whether or not liable to pay tax36—to mean a person with Canadiansource income.
In the circumstances, a more narrow reading of “particular corporation” is at the
very least one of the reasonable interpretations available for that phrase, and that is
sufficient to shift the emphasis from text to context and purpose. On such a reading,
subsection 15(2) would not apply to the loan in example 2.
A pp l i c at i o n o f S u b s e c t i o n 15 (2 . 3) :
A R e a d i n g U n d e r t h e M o d e r n A pp r o a c h
t o S tat u t o r y I n t e r p r e tat i o n
The majority of the exceptions to subsection 15(2) discussed above—specifically,
subsections 15(2.2) and (2.4) through (2.6)—are clearly inapplicable to the loan in
example 2 under any interpretation and will not be discussed further. Subsection
15(2.3), on the other hand, is potentially applicable and merits careful consideration.
Textual Reading of Subsection 15(2.3)
As noted earlier, subsection 15(2.3) provides that subsection 15(2) will not apply to
n
n
a debt that arose in the ordinary course of the creditor’s business, or
a loan made in the ordinary course of the lender’s ordinary business of lending money
provided that at the time of debt or loan arose, bona fide arrangements were made
for the repayment of the debt or loan within a reasonable time.
With respect to the first exception, the term “debt” is not defined in the Act.
Where a term is undefined, Canadian jurisprudence provides that the court must
apply a term’s legal meaning if such a meaning exists in the law of the particular
jurisdiction, followed by its commercial meaning if the term is used in a commercial
context and no legal meaning exists, and finally its everyday meaning if no other
meaning is found.37
35 87 DTC 5102 (FCA).
36 Subsection 248(1), the definition of “taxpayer.”
37 David A. Ward, “Finding the Meaning of Undefined Terms in the Income Tax Act,” in the
2002 Conference Report, supra note 2, 39:1-18, at 39:15.
the modern approach to statutory interpretation  n  381
A survey of the definitions of “debt” indicates that the term is well understood in
a legal, business, and ordinary sense. Black’s Law Dictionary defines a debt as a “liability
on a claim; a specific sum of money due by agreement or otherwise.”38 Commercially,
the Dictionary of Business Terms defines a debt simply as an “obligation to pay.”39 In
an accounting sense, a debt is a “sum of money owing by one person (the debtor) to
another (the creditor).”40 In ordinary language, the primary dictionary definition of
“debt” in the Concise Oxford English Dictionary is “money owed or due.”41 Thus, by
any understanding, “debt” is a broad term describing any amount of money owed
by one person to another. This certainly seems to capture the loan in example 2; as
a consequence of the loan, Forco is obligated to pay to Canco an amount of money.
Subsection 22(1) also suggests that “debt” is broad enough to include an obligation
arising from a loan; as one of the conditions for the application of the provision, it
mentions that the taxpayer must have sold all outstanding debts included in its income for the year, including “debts arising from loans made in the ordinary course
of the person’s business.” There is a presumption that a word or phrase should be
given the same meaning each time it is used in a particular statute unless the context
clearly suggests otherwise.42 On that presumption, if the term “debt” includes a loan
in subsection 22(1) (and it plainly does), it should include a loan for the purposes of
subsection 15(2).
If the loan in example 2 is a debt, the next question is whether it arose in the ordinary course of Canco’s business. Whether a transaction occurs in the “ordinary
course of the business” is a question of fact.43 The loan will be made in the ordinary course of Canco’s business if it is made as part of “the ordinary day-to-day
business activities [of the company], having no unusual or special features.”44 In
other words, for the loan to be outside the “ordinary course of the business,” it
would need to be “extraordinary or extracurricular in some distinct fashion and
clearly different from the day-to-day operation of the business.”45 It is also worth
38 Black’s Law Dictionary, 8th ed. This meaning was adopted in Cloutier-Hunt v. R, 2007 TCC 345,
at paragraph 11.
39 Jack P. Friedman, ed., Dictionary of Business Terms, 4th ed. (Hauppauge, NY: Barron’s, 2007).
40 Canadian Institute of Chartered Accountants, Terminology for Accountants, 4th ed. (Toronto:
CICA, 1983).
41 Concise Oxford English Dictionary, 11th ed.
42 Thomson v. Canada (Deputy Minister of Agriculture), [1992] 1 SCR 385; Bozzer v. Canada, 2010
FC 139; and Ho v. The Queen, 2010 TCC 325.
43 Heron Bay Investments Ltd. v. The Queen, 2009 TCC 337, at paragraph 58 (TCC). Heron Bay
was later overturned on appeal for procedural reasons (Heron Bay Investments Ltd. v. Canada,
2010 FCA 203).
44 Ibid. (TCC), at paragraph 53, quoting British Columbia Telephone Company v. MNR, 86 DTC
1286, at 1290 (TCC).
45 Heron Bay, supra note 43 (TCC), at paragraph 54, quoting Highfield Corporation Ltd. v. MNR,
82 DTC 1835, at 1843 (TRB).
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(2013) 61:2
noting that the inclusion of the word “the” in the phrase implies that the business
in consideration is specifically that of Canco and not of a business organization in
the abstract.46
No assumption has been made in the example regarding the history of Canco’s
business transactions. However, it is customary in many industries for a Canadian
parent to finance the activities of its subsidiaries in foreign countries. There are examples in the jurisprudence that support the notion that a loan to a related party can
be part of the ordinary course of the taxpayer’s business.47 Thus, it is entirely possible that Canco could meet this test and would consequently avoid the application
of subsection 15(2) on a textual reading of the provision.
The second exception in subsection 15(2.3) applies to “a loan made in the ordinary
course of the lender’s ordinary business of lending money.” There are two components to this exemption: Canco’s ordinary business must be the lending of money,
and the loan must be made in the ordinary course of this business.
The jurisprudence in respect of paragraph 20(1)(p), which uses language similar
to that in subsection 15(2.3),48 is instructive as to what constitutes an ordinary business of lending money. In Loman,49 a taxpayer in the warehousing business sought
to deduct a bad debt under paragraph 20(1)(p) that arose in respect of a loan made to
another member of its corporate group for commercial reasons. The court found
that in order to have an “ordinary business [that] includes the lending of money,”
the lending activities must be identifiable as a business. The court denied the deduction because the taxpayer’s business was warehousing; the lending of money was
merely incidental to this primary business purpose.
A similar result was reached in Newmont.50 The taxpayer in that case was in the
business of mineral exploration and development, and on occasion loaned money
and subscribed for shares in other companies holding attractive mineral properties,
as a means of acquiring an indirect interest in those properties. In each case, the
loans and share subscriptions were described as a package deal. One such advance
became uncollectible, and the court denied the paragraph 20(1)(p) deduction sought
46 Bastion Management Limited v. The Queen, 95 DTC 5238 (FCA).
47 See Loman Warehousing Ltd. v. The Queen, 99 DTC 1113, at paragraph 31 (TCC) (aff ’d. 2000
DTC 6610 (FCA)), where the Tax Court suggests that the loan between related parties at issue
in the case could have been made in the ordinary course of business even though that business
was not a business of lending money.
48 Subparagraph 20(1)(p)(ii) provides a deduction from business income for the cost of a bad loan
where, among other conditions, the taxpayer’s “ordinary business includes the lending of money”
and the taxpayer made or acquired the loan “in the ordinary course of the taxpayer’s business
of . . . the lending of money.”
49 Supra note 47.
50 Newmont Canada Corporation v. The Queen, 2011 TCC 148. The taxpayer’s appeal of the Tax
Court’s denial of the paragraph 20(1)(p) deduction was abandoned at the Federal Court of
Appeal: 2012 FCA 214, at paragraph 15. For an older decision that also arrived at a similar
result, see Chaffey v. MNR, 78 DTC 6176 (FCA).
the modern approach to statutory interpretation  n  383
by the taxpayer because the loan was incidental to its primary business of mining,
and not one of the ways that the taxpayer ordinarily earned income.
The cra has stated that it considers the following criteria to be indicative of an
ordinary business of lending money:51
1. The income earned from the lending of money is an integral part of the taxpayer’s business.
2.The taxpayer’s intention is to earn income from direct interest payments
rather than through the enhancement of the value of the investment.
3. The taxpayer is able to establish a systematic and continuous pattern of lending money.
The cra has suggested in the context of the paragraph 20(1)(p) deduction that it is
possible for a taxpayer to make a loan in the ordinary course of its business of lending money even if the primary purpose of the business is not the lending of money.52
Nevertheless, both the jurisprudence and the cra criteria suggest that the taxpayer
must meet a fairly high standard for its ordinary business to be the lending of
money. It seems unlikely that Canco would meet this standard in example 2.
It is worth noting that in several recent rulings, the cra has concluded that a
financing corporation whose sole activity is to borrow from a lender and on-lend to
other corporate group members (including foreign subsidiaries) with a spread would
be in the business of lending money.53 Though this is not explicitly stated, it is likely
that a spread (that is, some profit or possibility of profit) was necessary to obtain the
ruling in each case. These rulings suggest that in the context of example 2, Canco
may avoid the application of subsection 15(2) by incorporating a separate Canadian
financing company to make interest-bearing loans to Forco. However, tax would
generally be payable in Canada on the spread.
Contextual and Purposive Reading of Subsection 15(2.3)
As a starting point, the phrase “a debt that arose in the ordinary course of the credit­
or’s business” might be read in its immediate context—that is, with reference to the
rest of subsection 15(2.3). In this light, there is some doubt that the word “debt” is
used in the broad sense discussed above. Under the presumption against tautology,
“every word in a statute is presumed to make sense and to have a specific role to play
51 Interpretation Bulletin IT-442R, “Bad Debts and Reserves for Doubtful Debts,” September 6,
1981, at paragraph 11; and CRA document nos. 9905715E, June 22, 1999, and 2000-0013135,
April 3, 2000.
52 IT-442R, supra note 51, at paragraph 13. The CRA provides as an example a manufacturer in
the lumber industry where it is customary to make temporary advances to loggers that are
repayable out of deliveries.
53 CRA document nos. 2006-0211781R3, 2006; 2006-0191881R3, 2006; 2007-0225751R3, 2007;
2007-0244561R3, 2007; and 2007-0238971R3, 2007.
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(2013) 61:2
in advancing the legislative purpose.”54 If the term “debt” includes a “loan,” as suggested in the textual reading above, the second exception in subsection 15(2.3) is
rendered meaningless; any loan made in the ordinary course of the taxpayer’s business would qualify under the first exemption, and it would be irrelevant whether the
taxpayer was in the business of lending money or not.55
The presumption against tautology, like other principles of statutory interpretation, is an aid to interpretation. In Placer Dome, the Supreme Court of Canada noted
that the presumption can be rebutted “where it can be shown that the words do serve
a function, or that the words were added for greater certainty,”56 but concluded that
neither was the case on the facts at hand. One might interpret the suggested exceptions to the presumption as being exhaustive (that is, the presumption is an absolute
rule, with two and only two exceptions), but it is unlikely to have been intended as
such. A rule-and-exception based application of the presumption against tautology
would create a hierarchy of principles of statutory interpretation where two principles conflict, such as in the present case, where the principle of consistent expression
and the presumption against tautology produce conflicting conclusions. In the end,
the Supreme Court in Placer Dome did not use a rule-and-exception based approach,
concluding only that “[i]n the circumstances, the presumption against tautology
carries considerable weight.”57 That said, in the case of subsection 15(2.3), the immediate context clearly does indicate that the word “debt” should be read down to include
only debts that are not loans.
The purpose of subsection 15(2.3) may be inferred by considering the types
of loans to which it does and does not apply, keeping in mind the overall purpose of
section 15. In general terms, subsection 15(2.3) provides an exception for loans
made in the course of the lender’s business. An exception is appropriate in policy
terms because such loans are generally not comparable to dividends in economic
terms. Conversely, shareholder loans, which may be similar to dividends in economic terms, are not made in the course of business (that is, they do not form part
of the company’s profit-making activities) and are not excepted. The loan in example 2 resembles a business loan more closely than a shareholder loan. Its purpose
is to earn profit, not distribute profit. On that basis, one might conclude that the
loan in example 2 is the type of loan for which subsection 15(2.3) was intended to
provide an exception.
54 Sullivan, supra note 9, at 210. This principle was applied by the Supreme Court in a tax context
in Placer Dome, supra note 17, at paragraph 45.
55 CRA document no. 2004-0064811E5, February 8, 2006.
56 Placer Dome, supra note 17, at paragraph 46.
57 Ibid. (emphasis added).
the modern approach to statutory interpretation  n  385
A Unified Interpretation of Subsection 15(2.3)
A unified interpretation of subsection 15(2.3) must reconcile text, context, and purpose. While the term “debt” is relatively well understood, it is open to question
whether that term, when used in the context of subsection 15(2.3), should be read
to include a loan (as the ordinary use of the word would suggest) or whether it
should be read as a reference to “debts other than loans” in order to give meaning
to the second exception in this provision. When faced with such ambiguity, context
and purpose are to be emphasized, and in the present case the immediate context
(specifically, the presumption against tautology) is the most convincing element in
the analysis. On that basis, the better view is that the exception in subsection 15(2.3)
would not be available in respect of the loan in example 2. That said, a court that is
inclined to read and apply subsection 15(2) literally might also read subsection
15(2.3) literally and grant an exception on that basis.
Co n c l u s i o n
There are many instances where broadly worded provisions give rise to anomalous
results when read and applied literally. This article is primarily intended to illustrate
how the modern approach can be used in these instances to read the provisions in
question in a manner that gives rise to sensible conclusions. In the specific example
given, since it seems unlikely that a court would persist with a literal reading of subsection 15(2) in the face of absurdity, the sensible conclusion is that this provision
should be read with an emphasis on its context and purpose, and thus should not
apply to the loan in example 2.
The cra has not ruled on this specific situation. However, it did recently comment
on the application of the shareholder benefit rules where Canadian real estate is held
by a non-resident corporation with non-resident shareholders.58 The cra concluded that the benefit rules would likely apply, but in doing so it acknowledged that
the shareholder benefit provisions are broadly worded and can give rise to inappropriate results when applied literally. It made a point of noting that its conclusions
were supported by a textual, contextual, and purposive reading of the applicable
provisions. Conclusions aside, these comments provide some comfort that the cra
would consider the application of subsection 15(2) to the loan in example 2 in a
sensible manner.
58 CRA document no. 2012-0451241C6, January 16, 2013.