In indicating that interest on money borrowed by an Opco to make an interest-free loan to another corporation to fund the acquisition of Opco’s shares would not be deductible, CRA stated:
The interest expense on money borrowed and used to make an interest-free loan is generally not deductible since the loan is used directly to acquire property that cannot generate income. However, where it can be shown that the direct use can nevertheless affect the taxpayer's ability to earn income, the interest could be deductible.
… [T]he circumstances do not allow us to conclude that the interest-free loan granted by the operating corporation allows it to earn income.