"Borrower FA," which exclusively carries on an active business, borrows money from "Lender FA" to pay a dividend in an amount not exceeding its accumulated profits used in its business. Assuming the other s. 95(2)(a)(ii)(B) conditions are met, is the interest deductible by Borrower FA in computing the amount prescribed to be its earnings or loss from an active business, so that it will be included in the active business income of Lender FA? In responding affirmatively, CRA stated:
If the interest expense is not deductible by Borrower FA in any taxation year under the relevant foreign country's income tax law, it will nevertheless be deductible…pursuant to paragraph 5907(2)(j)… because it will be considered to have been made or incurred by Borrower FA for the purpose of gaining or producing earnings from an active business carried on by it as determined under subparagraphs (a)(i) or (ii) of the definition of "earnings" in subsection 5907(1)… .
Furthermore, the interest paid by Borrower FA will be deductible under paragraph 20(1)(c) in computing Borrower FA's earnings if those earnings are computed under subparagraph (a)(iii) of the definition of "earnings" in subsection 5907(1)… .
…[Accordingly] the interest paid by Borrower FA will be "deductible" in computing the amount prescribed to be its earnings from an active business regardless of whether those earnings are computed under the tax laws of a country other than Canada or under the provisions of the Act.