The scope of the s. 212(3.6)(b) rule for converting royalties into interest is unclear

S. 212(3.6)(b) extends the back-to-back loan rules to a situation in which an intermediary, who is a “relevant funder,” is a licensee rather than borrowing on a back-to-back basis. It is quite unclear what factual circumstances, if any, will come within the provision:

[I]t is utterly mysterious how a...royalty can be determined, in whole or in part, by reference to an amount of interest or how a relevant funding arrangement can be entered into because a specified royalty arrangement was entered into. While interest is compensation for the use or retention by one person of a sum of money owed to another...a royalty is compensation for the use of property… . It is not clear how a logical or legal connection between interest, on the one hand, and...royalties, on the other, can exist as suggested by paragraph 212(3.6)(b).

It also is unclear whether the rule in s. 212(3.6)(a) for converting upper-tier common share dividends into interest applies where the lower-tier "particular debt" had already disappeared by the time of the dividend declaration.

Neal Armstrong. Summary of Michael N. Kandev, "Canada Expands Back-to-Back Regime: Examining the Character Substitution Rules," Tax Notes International, June 19, 2017, p.1087 under s. 212(3.6)(b).