CRA appears to accept its inability to recharacterize a cross-border obligation as equity in a transfer-pricing context

In the interpretation described in the post immediately below, the Rulings Directorate went on to indicate that if the local CRA office determined that the interest rate payable by Canco to its non-resident parent departed from the arm’s length transfer pricing standard (i.e., there was a departure described in Article IX of the applicable Treaty from the "conditions" that would have been made between independent enterprises), then a resulting reassessment of Canco to deny some of the interest deduction would be subject to the time limitation contained in Article IX.

The Directorate went on to indicate that if the applicable intercompany instrument

were a commercially common instrument which would be classified as an equity investment even if it were entered into between independent enterprises…such a reassessment would not be subject to the time limitation period in [Article IX] because it would not be as the result of conditions made or imposed between the two enterprises in their commercial or financial relations which differed from those which would be made between independent enterprises.

The italicized words (referring to calling something equity only if it essentially is equity) suggest that CRA accepts that it does not have any significant ability to recharacterize the instrument the parties entered into as contrasted to requiring that the terms chosen be arm’s length terms.  See Brian Bloom and François Vincent, "Canada's (Two) Transfer-Pricing Rules: A Tax Policy and Legal Analysis."

Neal Armstrong.  Summary of 3 June 2013 Memorandum 2012-0468131I7 under Treaties - Article 9.