A partnership (P), whose partners (FA1 and FA2) are foreign subsidiaries of Canco, borrows money from another foreign subsidiary (FA3) of Canco in order to fund the purchase of the shares of a foreign corporation (FA4) that are excluded property (EP). S. 93.1(4) deems P to be a non-resident corporation for the purpose of applying s. 95(2)(a)(ii)(D) (such that interest paid by P to FA3 will be included in computing the income or loss from an active business of FA3), but does not deem P to be a non-resident corporation for s. 15 purposes.
S. 15(2.2) provides that s. 15(2) does not apply to indebtedness between non-resident persons, and s. 15(2.1) provides an exception to s. 15(2) respecting certain foreign affiliates that are debtors. Does s. 15(2) apply in this situation?
CRA noted that ss. 15(2) and (2.1), in various places, for example, in the preamble to s. 15(2.1), specifically extend their application to partnerships, but that there is only a reference to a person, and not a partnership, when dealing with the carve-outs in ss. 15(2.1)(a) and (b) regarding dealings with foreign affiliates.
Accordingly, in this situation, there is a FAPI policy concern that has been brought to the attention of the Department of Finance.