A wholly owned Canadian subsidiary (Canco) of a US shareholder had two foreign affiliates (FC 1) and FC 2), both of which had unrelated non-resident shareholders. Canco made an interest-free loan to FC 1 on the basis that FC 1 would on-lend the proceeds as a non-interest-bearing loan to FC 2, which used the loan proceeds to earn income from an active business. Both loans remained outstanding for more than one year.
CCRA noted that where s. 17(3)(a) did not apply, i.e., FC 1 and FC2 were not both controlled foreign affiliates of Canco, there could be double taxation. Specifically, s. 17(1) could apply to the loan to FC 1, and due to the application of s. 17(2), s. 17(1) could also apply to the subsequent loan to FC 2.