In 2013-0496841I7, CRA took the position that s. 95(2)(a)(ii)(D) did not apply to recharacterize interest on a debt ("Note 2") issued by FA2 to acquire a note ("Note 1") that was subsequently contributed to the capital of another foreign affiliate (FA3) by FA2 without the receipt of shares. CRA reversed that position in 2014-0519801I7 [also summarized under 2013-0496841I7]. Why the reversal? CRA responded:
[W]e are now of the view that the purpose test that must be met when reading subclause 95(2)(a)(ii)(D)(II) ("Subclause (II)") in conjunction with Subclause (III) being that the purpose of the acquisition of a property be the earning of income from property where the property is shares of a foreign affiliate will be met even if the property acquired (Note 1) on the issuance of Note 2, as referred to in Subclause (II), is not the same property as that referred to in Subclause (III), being the shares of FA3, as long as the property (Note 1) has been acquired for the purpose of earning income from those shares of FA3.
…[S]ince the contribution to FA3 of the property acquired (Note 1) enhanced the dividend earning capacity of FA2 with respect to the FA3 shares, we consider, notwithstanding that no new shares of FA3 were issued, that the acquisition of Note 1 by FA2 meets the purpose test, i.e. Note 1 was acquired for the purpose of gaining or producing income from property being the shares of FA3, as of the time of the contribution. Therefore…the interest paid on Note 2 by FA2 to FA1 would be recharacterized as active business income of FA1… .