Third Quarter Interest Rates and PLOI

On June 12, 2014 CRA announced the prescribed interest rates for the 3rd quarter of 2014 (July to September) will remain unchanged from the 2nd quarter.  

Interest rates to be used for “pertinent loans or indebtedness” (PLOI) are set at 4.93%, and a review of this definition is useful.

The provisions originated in the March 28, 2012 Federal Budget to curtail what has been termed as Foreign Affiliate Dumping. Prior to the legislation, a Corporation Resident in Canada (CRIC) would borrow money in Canada for the purchase of shares in a foreign affiliated company that was not dealt with at arms-length. Since the funds were borrowed for the purposes of earning income, interest paid on the loan was tax deductible. The CRIC would then receive dividends back from the foreign affiliate which, because they did not operate at arms-length, were tax exempt.

The prescribed rate, currently 4.93%, has been set to eliminate loans being structured at low or no interest thereby protecting the Canadian tax base. Further:

1. The foreign affiliate is now required to withhold Canadian income tax from dividend payments made to the Canadian corporation.
2. The corporation may elect under section 17.1 to have all payment treated as interest income which accomplishes eliminating the tax withholding on dividends.