CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC sub to an S-Corp

Where an S-Corp (described by the questioner as fiscally transparent for U.S. purposes, so that its income is taxable in the hands of its U.S. shareholders) makes an interest-bearing loan to a Nova Scotia ULC (held by it through a qualified Subchapter S subsidiary), the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS, whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC affects the Code treatment of the interest.

The answer implicit

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9 under Treaties – Art. 4.