A portion of the interest paid by CanCo to ForCo, which is a controlled foreign affiliate of the Canadian parent of CanCo, is not deductible pursuant to s. 18(4) and is deemed by s. 214(16) to have been paid as a dividend. CanCo designated one of the interest payments under s. 214(16)(b) to be a dividend. Should CanCo make corresponding adjustments to its low rate income pool (“LRIP”) or general rate income pool (“GRIP”) (as applicable) at the time the deemed dividend is paid; and is the amount received by ForCo a dividend rather than interest so as to be excluded from the foreign accrual property income (“FAPI”) of ForCo? The Directorate stated:
Even though the definition “taxable dividend” applies for the purposes of the Act, the interest paid or credited under subsection 214(16) is deemed [under the s. 214(6) preamble] to have been paid as a dividend solely for the purposes of Part XIII and, accordingly, it is considered to be a “taxable dividend” solely for the purposes of Part XIII. Therefore … CanCo’s LRIP/GRIP balances (as applicable) would not be affected [and] subsection 214(16) would not alter the character of the income received by ForCo for FAPI purposes.