Interest that is denied under the thin cap rules and recharacterized as dividends is still interest for FAPI and LRIP/GRIP purposes
A portion of the interest paid by CanCo to ForCo, which is a controlled foreign affiliate of the Canadian parent of CanCo, is not deductible pursuant to s. 18(4) and is deemed by s. 214(16) to have been paid as a dividend (with CanCo designating under s. 214(16)(b) which particular payment is deemed to be the dividend.)
CRA noted that, as per its preamble, s. 214(16) only applies for Part XIII purposes, so that s. 214(16) would have no effect on CanCo’s LRIP or GRIP balances nor alter the character of the income received by ForCo as interest for foreign accrual property income purposes.
Neal Armstrong. Summary of 5 October 2017 Internal T.I. 2015-0614021I7 under s. 214(16).