Porter and Bunn suggest streamlining the unduly-restrictive s. 95(2)(a)(ii)(D) rule

S. 95(2)(a)(ii)((D) typically deems interest income on a loan from one foreign affiliate (FA1) to FA2 to be active business income of FA1 where FA2 used the borrowed money for the purpose of earning income from excluded-property shares of FA3.  Shawn Porter (who no longer is at Finance) and David Bunn submit that this use test is unduly restrictive.  For example, it will be problematic if:

• FA2 borrows from FA1 to distribute paid-up capital which is attributable to FA3;
• Moneys borrowed by FA2 from FA1 are used on its merger with the Holdco for FA3 to redeem Holdco shareholders; or
• FA2 borrows money from FA1 to distribute PUC to Canco (viewed as a borrowing which on a "fill the hole" tracing theory relates indirectly to FA2 earning income from FA1 shares).

They suggest streamlining the rule:

[I]ncome of a particular FA would be eligible for ABI characterization in circumstances where the income is derived from amounts that are paid or payable to the particular FA…by another FA of the taxpayer to the extent the amounts are deductible by the other FA in computing income from a property of the other FA that qualifies as an excluded property throughout the particular period.

Neal Armstrong.  Summary of Shawn D. Porter and David Bunn, "Is it Time to Simplify the Holding Company Rule?", International Tax Planning (Federated Press), Volume XIX, No. 2, 2014, p. 1304 under s. 95(2)(a)(ii)(D).