CRA interprets the s. 95(2)(a)(ii)(D)(IV)2 reference to “income” to include “loss,” but indicates that s. 95(2)(a)(ii)(D)(IV)2 does not work re an LLC interest that is sold before year end

S. 95(2)(a)(ii)(D) may recharacterize interest received by a non-resident sub (“CFA”) of Canco as active business income if the loan was made by CFA to a non-resident subsidiary (FA2) to finance FA2's purchase of FA3 shares that are excluded property. However, where one or both of FA2 and FA3 are fiscally transparent LLCs, s. 95(2)(a)(ii)(D)(IV)2 requires that their members at the end of their relevant taxation year be subject to U.S. tax on substantially all of such FA's income for that year.

CRA considers that this requirement will be satisfied even if, in the particular year, FA2 or FA3 experiences a loss rather than income. However, it considers that the words simply are not satisfied respecting, say, FA3, if FA2 (in this example, a C Corp.) disposes of its membership interest in FA3 before the end of the year, so that FA2 cannot satisfy the s. 95(2)(a)(ii)(D)(IV)2 requirement that it be a member of FA3 at the end of that year. This latter issue has been forwarded to Finance.

Neal Armstrong. Summary of under s. 95(2)(a)( 26 April 2017 IFA Roundtable, Q.7 under s. 95(2)(a)(ii)(D)(IV)2.