The 0.1% general partner interest in some LPs carrying on business is held by a corporation (Eco) at the bottom of a stack of wholly-owning corporations (Aco holds Bco, which holds Cco, which holds Dco, which holds Eco), and the 99.0% limited partner interests in the LPs is held by Dco.
Regarding a bank loan received by Dco whose proceeds are used by it to make an interest-free loan to the LPs, CRA stated:
[T]he comments in … S3-F6-C1, [paras. 1.54, 1.55] could apply in the partnership context … .
[I]f … it is shown that the loans made by Dco to the LPs affect Dco's ability to earn income from the LPs, the interest on Dco's loan from the financial institution may be deductible to Dco pursuant to subparagraph 20(1)(c)(i), if all other conditions are otherwise satisfied.
Regarding the bank loan instead being made to Aco which uses the proceeds to directly or indirectly make an interest-free loan to the LPs (e.g., making such loan to Dco which, in turn, makes interest-free loans to the LPs, or to Bco, with back-to-back interest free loans made all the way down the stack), CRA stated:
[I]n light of … Canadian Helicopters, the fact that the taxpayer's income is derived from dividends from stacked corporations should not be a factor that … prevents a taxpayer from relying on the direct use of borrowed funds exception to make an interest-free loan.
[I]t would be necessary to assess … whether the interest-free loans made by Aco to the LP, Bco or Dco … affect Aco's ability to earn income. If so, the interest on Aco's loan from the financial institution may be deductible to Aco pursuant to subparagraph 20(1)(c)(i) on the basis of the exceptional circumstances principle, if all of the conditions are otherwise satisfied.