CRA states that, in the context of TCP characterization, upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently

In the context of providing guidelines on whether shares of non-resident corporations (“NRCos”), with various direct or indirect wholly-owned Canadian operating subsidiaries holding to some extent Canadian real property or other potentially tainting properties, are taxable Canadian property, the Rulings Directorate’s established position is that (i) the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the fair market value of the NRCo shares was derived directly or indirectly from the Canadian real property etc., and (ii) that for these purposes the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from the Canadian real property etc.

For these purposes, a downstream loan within the group is effectively ignored and is treated instead as increasing the FMV of the shares of the particular wholly-owned subsidiary. However, recognizing an upstream loan would result in double counting because the assets acquired by the parent out of the proceeds thereof would already be counted for purposes of the tests – so that the loan’s value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary. The treatment of a loan made to a sister depends on a range of factors but, generally, will be treated similarly to a downstream loan if that is reflective of the ultimate use of the funds, and otherwise generally will be recognized (if it is not part of a back-to-back loan made by the parent to a subsidiary).

Neal Armstrong. Summary of 1 May 2017 Internal T.I. 2015-0624511I7 under s. 248(1) – taxable Canadian property para. (d).