Reversing an earlier position, CRA now acknowledges that s. 95(2)(a)(ii)(D) applies in an indirect use situation

An immediate LLC subsidiary of Canco (NR1) sold a subsidiary engaged in an active business (NR6) to a great-grandchild (NR4) in consideration for Note1 of NR4, and then sold Note1 to its immediate subsidiary (NR2) in consideration for Note2 of NR2.

Applying McCool, CRA found that 95(2)(a)(ii)(D)(I) did not apply to recharacterize the interest on Note2 as active business income as Note2 represented purchase-price indebtedness rather than borrowed money. Furthermore, s. 95(2)(a)(ii)(D)(II) also was not available as "NR2 acquired Note1 in consideration for the issuance of Note2…[so that] the property acquired was not shares of another foreign affiliate." As noted by Barnicke/Huynh, this finding was suspect, as s. 95(2)(a)(ii)(D) "does not require that borrowed money or purchase debt be used directly to acquire property that is shares of another FA that are excluded property... [and] the preamble ... also refers to direct or indirect use."

CRA (without explanation) has now specifically reversed this earlier interpretation, stating that s. 95(2)(a)(ii)(D)(II) "applies in the circumstances," so that "the interest received on Note 2 should [not] be included in the FAPI of NR1."

Neal Armstrong.  Summary of 21 October 2013 Memorandum 2013-0496841I7, as reversed by 16 September 2014 Memo 2014-0519801I7 under s. 95(2)(a)(ii)(D).