Thin Cap Rules for Debt with no Interest

Tax Topics
1

I have a client who is a non-resident but he’s from NS originally. He incorporated a company in NS to invest in a special partnership that will payout returns in 8-10 years. The partnership will require some cash injections over the next three years.

If he were to contribute the cash into the corporation in the form of an interest-free loan, would there be any ramifications from the thin capitalization rules?

I hoping this is allowable because when the partnership starts to pay out in 8-10 years, he could take the initial payouts tax-free against this loan without worrying about having to retract the shares if he contributed the initial capital via equity.

No other investors will acquire shares of his corporation so there’s no issue of PUC dilution etc.

In the end, CRA will still get the same piece of the pie (tax from the investment returns in the corp, and tax on his personal income for the investment returns over and above the initial cash contributions/loan).

2

I’ve received confirmation from a colleague who was national tax leader at a large firm for many years that thin cap rules only apply to interest bearing loans, which is somewhat obvious. But I wanted to make sure that it was OK that a foreign shareholder held a non-interest bearing loan to his company and he confirmed that was also OK.