CRA indicates it would not apply s. 90(7) to a back-to-back loan made to avoid an anomalous application of the s. 90(9) surplus deduction rule

Where Canco holds FA1 with an exempt deficit of $20M, which holds FA2 with exempt surplus of $100M, Canco can take advantage of the surplus deduction rule in s. 90(9) on an upstream loan of, say, $10M from FA2. This is by having FA2 lend that sum to FA1 for on-loaning to Canco. This permits the elevation of the exempt surplus of FA2, so that FA1 is considered to have ample surplus for purposes of accessing the s. 90(9) deduction on the $10M loan to it from FA1 – whereas this result would not obtain if FA2 made the $10M loan directly to Canco.

However, this planning confronts the back-to-back loan rule in s. 90(7) which, applied literally, would deem FA2 to have made its loan directly to FA1. However, having regard to the policy of the provisions, CRA would not apply s. 90(7) in a situation such as this.

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 5 under s. 90(8).