The new back-to-back loan rule is an anti-conduit rule which undercuts legitimate Treaty benefits

The absence of a safe harbour in s. 212(3.1)(b), from the application of the back-to back loan rule for non-resident non-arm’s length intermediaries (who would not enjoy the statutory withholding tax exemption for arm’s length interest anyway), shows that an aspect of this rule is to be an anti-conduit rule that targets situations where that intermediary is fronting for a creditor with an inferior treaty standing.  However, the rule operates mechanically.

This produces questionable results. For example, if the identified solution - to the application of the anti-hybrid rule in Art. IV(7)(b) of the Canada-U.S. Treaty to a loan by an LLC (with two "good" U.S. persons as partners) to a ULC subsidiary - is for the two U.S. partners to form a parallel financing LLC through which the debt financing is routed to the ULC, this rule would undermine that solution.

Neal Armstrong. Summary of Michael N. Kandev, "Canadian Interest Anti-Conduit Rule Soon to Be Law," Tax Notes International, December 15, 2014, p. 1027 under s. 212(3.1)(d).