What is the requisite degree of linkage referenced by the "because" test in clause (B) of ss.18(6)(c)(i), 18(6)(c)(ii), 212(3.1)(c)(i) and 212(3.1)(c)(ii) (the "Clause B causality tests") between a debt owing by the taxpayer to a creditor and a secondary obligation existing between that creditor (or someone not dealing at arm's length with that creditor) and certain non-residents, so as to engage s. 18(6.1) or 212(3.2)? CRA responded:
The so-called "back-to-back loan" arrangements were described [in the 2014 Budget] as generally involving the interposition of a third party (e.g., a foreign bank) between two related taxpayers (such as a foreign parent corporation and its Canadian subsidiary) in an attempt to avoid the application of rules that would apply if a loan were made, and interest paid on the loan, directly between the two taxpayers.
…[T]he October 2014 Explanatory Notes…[state] that the conditions listed in paragraph 212(3.1)(c) closely mirror those in paragraph 18(6)(c)… . CRA will interpret the Clause B causality tests in both of these provisions in the same manner and broadly enough to fulfill the policy intent of the new back-to-back loan rules as described in the 2014 Budget Plan. …[G]enerally, in a case where a third party intermediary is interposed between two related taxpayers principally for the purpose of avoiding the application of subsection 18(4) or Part XIII tax on interest…we would find that there is sufficient linkage between the two debt instruments involved to engage the new rules.