CRA rules on using an LP to avoid application of the anti-hybrid rule to interest paid by a ULC to its S Corp parent

A U.S. S Corp which currently is subject to 25% Canadian withholding tax on interest paid on a note of its wholly-owned ULC subsidiary due to the application of the anti-hybrid rule in Art. IV(7)(b) of the Canada-U.S. Treaty, will avoid that withholding tax by transferring the note to a newly-formed LP between it and one of its individual shareholders (presumably with a much more modest partnership interest than it).

CRA ruled that this would avoid Art. IV(7)(b) on the basis that, for Code purposes, interest on the note "will be reported as income of LP…in the same manner as the interest would be if ULC was not fiscally transparent" under the Code.

Neal Armstrong.  Summary of 2014 Ruling 2013-0491331R3 under Treaties – Art. 4.