CRA rules that passive interest income qualifies under the active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty

The active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty permits a U.S. resident who derives income from Canada to claim Treaty exemptions with respect to that income if it or a related person is engaged in an active trade or business in the U.S., the income in question is derived in connection with, or is incidental to, that trade or business, and the U.S. active trade or business in the U.S. is substantial relative to the activity in Canada that gave rise to the income in question. CRA ruled that a U.S. C-Corp (ForSub) could access this rule with respect to interest paid to it on a note owing by a Canadian affiliate carrying on (through a partnership) the same business in Canada notwithstanding that the U.S. related business activities were all carried on by LLC sisters of ForSub and there was no indication in the facts that it was anything other than a Finco.

Neal Armstrong. Summary of 2014 Ruling 2013-0511761R3 under Treaties – Art. 29A.