Cansub is a wholly-owned subsidiary of Canco which, in turn, is wholly-owned by MNC, a non-resident multi-national corporation. All the treasury functions for the group are carried out by Cansub. Cansub lends to non-resident subsidiaries of MNC (Foreign Subs) at market rates of interest, and bona fide arrangements are made for repayment of the loans within a reasonable period of time.
CRA stated:
Cansub only lends money to the members of the Group with whom it does not deal at arm's length. One would expect that in an ordinary business of lending money, loans would be made to arm's length persons. Hence, it may be that any loan made by Cansub to the Foreign Subs cannot be said to be made in the ordinary course of Cansub's ordinary business of lending money. …
In the event that a corporation's business includes the making of loans but those loans cannot be viewed as having been made in the corporation's ordinary business of lending money, it is our view that those same loans cannot be considered as "debts that arose in the ordinary course of the creditor's business". ... [W]here a loan is made by a taxpayer as a lender, the phrase "a debt that arose in the ordinary course of the creditor's business" in subsection 15(2.3) is not applicable to that taxpayer in respect of the loan. That phrase is meant to cover situations where an indebtedness other than a loan occurs... .This is so because a lender/borrower relationship is more specific than a creditor/debtor relationship.