When asked to describe a situation in which s. 17(2) would apply and which would not have been GAARable before the enactment of s. 17(2), CRA referred to the following structure.
Canco wholly owns Foreign Corporation 1 (“FC 1”) which holds an interest in a foreign affiliate, Foreign Corporation 2 (“FC 2”), which is not a CFA of Canco and is resident in a designated treaty country. Canco subscribed for shares of FC 1, which used the proceeds to make an interest-free loan to FC 2 that has been outstanding for over a year and was used in FC 2’s active business.
S. 17(2) would deem FC 2 to be indebted to Canco in an amount equal to its debt to FC 1.