15 May 2019 IFA Roundtable Q. 4, 2019-0798721C6 - 78(1)(b)(ii) deemed loan & thin capitalization -- summary under Subparagraph 78(1)(b)(ii)

The thin cap rules apply to “outstanding debts to specified non-residents”, whose definition specifies that there is deductible interest paid or payable on them. Where the Canadian debtor and the non-resident creditor make an s. 78(1)(b)(ii) agreement to deem the amount of simple interest owing by the one to the other to be a loan, CRA generally considers that the amount of the deemed loan would not be an outstanding debt to a specified non-resident for the purposes of ss. 18(4) and (5) until the compound interest is paid and thereby becomes deductible under s. 20(1)(d).