The Minister took the position on audit that a loan made by a Netherlands Antilles subsidiary of the taxpayer ("Honeywell N.V.") to a Netherlands subsidiary ("B.V.") of the taxpayer's U.S. parent violated the policy underlying clause 95(2)(a)(ii)(b) because that clause was intended only to avoid fapi treatment of loans made to foreign affiliates of a Canadian based multinational corporation. The Minister received a waiver respecting "interest income being reassessed under paragraph 12(1)(c) of the Income Tax Act, by reason of the application of section 245 of the Income Tax Act."
The Minister was precluded from amending his Reply (well after the expiry of the normal reassessment period) to allege that the funds lent by Honeywell N.V. to B.V. were not used in an active business of B.V., so that the exemption in clause 95(2)(a)(ii)(B) was not available irrespective of the general anti-avoidance rule in section 245. Noël J.A. stated (at p. 5077) that:
"Including interest in Honeywell's income under paragraph 12(1)(c) because of a GAAR re-characterization is entirely different from including the interest income of Honeywell N.V., its foreign affiliate, in Honeywell's income pursuant to the FAPI rules as the Crown now tries to assert ... ."