17 April 1991 Memorandum (Tax Window, No. 2, p. 17, ¶1203)

On a merger of a direct U.S. subsidiary with a grandchild U.S. subsidiary under U.S. laws which provide that the assets and liabilities of a corporation which cease to exist on the merger are acquired by the survivor corporation, a loan between the Canadian parent and the grandchild subsidiary will be extinguished and s. 17(1) will cease to apply. On the other hand, where a Canadian corporation amalgamates with its wholly-owned subsidiary, the amalgamated corporation will be deemed by s. 87(2)(e) to have acquired a loan which the Canadian parent had made to a U.S. corporation which was a wholly-owned subsidiary of its Canadian subsidiary, with the result that s. 17(1) will continue to apply. The relieving provisions of s. 17(3) does not apply in the absence of a rule analogous to s. 87(7).

Where a Canadian corporation makes a non-interest bearing loan to its wholly-owned U.S. subsidiary and then transfers the shares of the subsidiary to its Canadian parent (i.e., a grandparent of the U.S. subsidiary), after the transfer s. 17(3) will no longer apply to the loan because the U.S. subsidiary is no longer a "subsidiary controlled corporation" of the Canadian transferor.