CRA may reduce interest income to the recipient when it denies interest deductions on related person loans

In numerous CRA challenges to interest rates on loans between sister companies, parents and subsidiaries, and in cross border hybrid debt structures, Gosselin and Lynch “have seen significant reductions to interest rates claimed to nominal amounts and in some cases zero.” However, although in theory, the interest income to the creditor could remain fully taxable even following such reduction in the interest deduction, in some files they “have seen CRA apply a policy… to reduce interest income of the recipient entity” by analogy to a two-sided adjustment policy for management fees (see, e.g., 2012-0440071E5).

Neal Armstrong. Summary of Marie-Eve Gosselin and Paul Lynch, "A Review of Interest Deductibility Since Ludco," draft 2015 CTF Annual Conference paper under s. 20(1)(c).