Where a taxable Canadian corporation makes a non-interest bearing loan to a controlled foreign affiliate (CFA 1) which, in turn, uses the proceeds to acquire the debt (the "Debt") of another CFA (CFA 2) from a non-arm's length Canadian corporation. CRA found that s. 17(8)(a)(ii) was not available as the Debt would not be considered to be a loan to the second CFA. In this regard, CRA quoted a judicial statement that "the courts have concluded that the concept of loan or advance is related to the existence of a payment of money between two parties and to the presence of that relationship of lender / borrower," and then stated:
[T]he contractual relationship between CFA 1 and CFA 2 with respect to the Debt establishes a creditor/debtor relationship and not a lender/borrower relationship. In fact, there was no agreement, either implied or explicit, nor a payment or acceptance of money between CFA 1 and CFA 2, which could enable us to conclude that there is a lender/borrower relationship. Although CFA 1 became the creditor of CFA 2 while acquiring the Debt, it never made a loan per se.