Aco lent money to Bco, its wholly owned subsidiary, which on-lent the funds to Cco, its wholly-owned subsidiary, which used the funds in its active business. Bco does not carry on any business and such interest income is its only income. CRA indicated that the interest paid by Cco to Bco, which was recharacterized in Bco’s hands as active business income, and that as:
the interest expense paid by Bco to Aco is or may be deductible in computing its income from an active business carried on by it in Canada. Consequently, the amount paid or payable by Bco as interest is deemed to be income of Aco from an active business carried on by it in Canada.