Do we need a study for a loan from our parent company?
If interest is being deducted in Canada on a loan from a related lender, the rate is a price and it is tested like any other. The study establishes what the borrower's own credit standing would be as a standalone business, allows for the support it gets from being inside the group, then prices the specific terms, meaning the term itself, the currency, the security and the covenants, against market data. Separately, capital-structure rules can cap the deduction whatever the rate is, so both questions need answering rather than one.
Should we price an intercompany loan off the group's credit rating?
No. Pricing starts with the borrower's own credit standing, not the group's, and the difference between the two is where the analysis lives. A subsidiary with thin equity and a short trading history does not borrow on its parent's terms in the open market. The exercise is to build a standalone rating from the borrower's financial profile and its industry, then adjust for the benefit it gets from belonging to the group. Using the group rating straight off understates the rate; ignoring group membership altogether overstates it. Both leave the file exposed.
What is implicit group support and how does it affect the rate?
It is the advantage a borrower gets from being part of a group even where the parent has given no formal undertaking: a lender's expectation that a parent is unlikely to let a strategically important subsidiary fail. It sits between the standalone position and the group position, and it is a judgement about how integrated this borrower is and how much the group needs it. It usually improves the borrower's assessed credit from the standalone starting point, which lowers the rate. Because it is a judgement, the file has to record the reasoning and not just the conclusion.
Can the interest be denied even if the rate is arm's length?
Yes, and this catches people who assume a pricing study settles everything. Pricing answers whether the rate is what an independent lender would have charged. Capital-structure rules work on a different question, which is how much debt the borrower should be carrying at all, and they can restrict the deduction regardless of how well the rate is supported. So the two analyses run together: price the loan properly, and separately test the amount of the borrowing against those limits, before the funding is put in place rather than after.
Does a loan with no security and no covenants change the rate?
It does, upwards, and that is the point most often missed when the intercompany paperwork is thin. An unsecured loan with no covenants, no fixed repayment schedule and no consequence for default is a riskier instrument than the secured, covenanted facility a bank would provide, so comparing it with bank pricing understates the rate. The alternative reading is worse: an instrument with none of those features may not be debt in substance at all. Pricing the terms you actually have means first writing down what they are.
How do we price an intercompany loan in a foreign currency?
Currency is one of the terms being priced, alongside the term, the security and the covenants, so the comparison has to be with debt in the same currency. Market rates differ between currencies for reasons that have nothing to do with this borrower, and converting a rate from one currency to another at an exchange rate is not a pricing method. Where the borrower earns in one currency and borrows in another, the exposure sits somewhere, with the borrower or the lender, and the analysis has to say which, because that allocation changes the risk being priced.
What is a foreign trust for US tax purposes?
A trust that is not a domestic trust — broadly, one that fails the tests looking at whether a US court can exercise primary supervision and whether US persons control the substantial decisions. The classification decides everything downstream: whether the settlor is taxed on the income as owner, how distributions to US beneficiaries are taxed, and which annual information returns are due. Many ordinary foreign arrangements, including some pension and education savings vehicles, land inside the definition. See Form 3520-A.
Does a foreign-owned US entity need an EIN?
Yes, for almost anything it must do: file its returns, operate payroll, open a bank account, and act as a withholding agent on payments abroad. It is applied for on Form SS-4, and the part that stalls foreign owners is the responsible party — a real person with a US identification number is expected, and where none exists the application route and the supporting explanation both change. It is worth starting early because downstream registrations queue behind it. See EIN applications.
