Inbound debt into Canada generally should not be recharacterized as equity under the transfer-pricing rule given the annual application of the thin cap rule

CRA and the OECD acknowledge that recharacterizing a transaction under the transfer-pricing rules is an exceptional step which should only be taken in limited circumstances. On the other hand, a non-resident parent’s capitalization or recapitalization of it Canadian sub "is not something that could (ever) be undertaken by arm's-length parties," so that this un-exceptional transaction would seemingly lend itself to frequent recharacterization through treating loans to Canadian subs as equity.

The likely answer to this dilemma is that the cross-border interest is annually tested under the thin cap rule, so that there should be "little scope" for the recharacterization rule in s. 247(2)(d) to operate.

Neal Armstrong. Summary of Derek G. Alty and Brian M. Studniberg, "The Corporate Capital Structure: Thin Capitalization and the ‘Recharacterization’ Rules in Paragraphs 247(2)(b) and (d)," Canadian Tax Journal, (2014) 62:4, 1159-1202 under s. 247(2).