FA Finco, a foreign affiliate of Canadian Parent, lends money to FA Acquireco LLC (a US fiscally-transparent subsidiary of FA Holdco (which is a non-transparent Delaware subsidiary of Canadian Parent) to acquire all the shares of FA Target LLC (also fiscally transparent), which is merged into FA Acquireco LLC (renamed “Mergeco LLC”). The shares and property of all such LLCs are excluded property and Mergeco LLC only earns active business income.
Regarding the application of s. 95(2)(a)(ii)(B), CRA indicated that, in order for that provision to apply, the interest must be deductible in computing the (active business) earnings of Mergeco. Since Mergeco is a disregarded entity, Reg. 5907(1) – earnings – (a)(iii) requires such earnings to be computed under Part I for such purposes. This wording engages the current use test under s. 20(1)(c) – which should be satisfied since the Mergeco property would be used in an active business.