CRA considers that s. 95(2)(a)(ii)(D) can recharacterize a loan prepayment penalty as active business income

Where a loan from one controlled foreign affiliate (FA Finco) of Canco to a second CFA of Canco (FA Holdco) meets the conditions in s. 95(2)(a)(ii)(D), CRA considers that a prepayment penalty paid by FA Holdco to FA Finco also can be recharacterized as active business income by s. 95(2)(a)(ii)(D) if the penalty is first recharacterized as interest under s. 18(9.1)(e).

Neal Armstrong. Summary of 27 January 2017 External T.I. 2013-0482351E5 under s. 95(2)(a)(ii)(D), s. 18(9.1) and Reg. 5907(2.7).