S. 95(2)(a)(ii)(D) is drafted too restrictively in light of the underlying policy to extend s. 95(2)(a)(ii)(B)
S. 95(2)(a)(ii)(D) (“Cap D“) has been drafted too narrowly in relation to its underlying policy, which is to expand the basic rule in s. 95(2)(a)(ii)(B) in order to accommodate the indirect internal funding of an FA Opco (“FA3”) through internal debt financing By FA1 of a holding company (“FA 2”) for FA3. In particular:
- Cap D imports the narrow s. 20(1)(c) terminology, whereas s. 95(2)(a)(ii)(B) applies to any amount as long as the deductibility criterion therein is met. “Thus, for example, it is not clear why Cap D is not available in respect of royalties.”
- The requirement for a throughout-the-year connection between FA2 and FA3 can pose difficulties for mid-year reorganizations.
- “The subject to tax criterion has generally been the most problematic condition of Cap D.” Although the rule has been relaxed to somewhat accommodate US LLCs, “as becomes obvious from the questions put forward at the recent IFA seminar [2017-0691221C6], certain issues remain in this area.”
Neal Armstrong. Summary of Michael N. Kandev, "Putting on our Thinking Cap About "CAP D", International Tax (Wolters Kluwer CCH), June 2017, No. 94, p. 5 under s. 95(2)(a)(ii)(D).