CRA indicates that interest on shareholders’ borrowings to fund an interest-free corporate loan may be deductible even if the proportionate-to-shares test is not met

In S3-F6-C1, para. 1.55, CRA states:

Generally, a deduction for interest will be allowed if borrowed money is used to make an interest-free loan to a wholly-owned corporation (or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings) and the proceeds have an effect on the corporation's income-earning capacity.

CRA has now clarified its comments in the same part of the Folio on Canadian Helicopters by stating that, where the above test is not satisfied (e.g., where the loans are disproportionate to the shareholdings) then, in order to enjoy interest deductibility:

[T]he taxpayer must demonstrate that making an interest-free loan to a corporation affects the taxpayer's income-earning capacity and, therefore, that there is a sufficient link between the interest-free loan and a source of the taxpayer's income.

Neal Armstrong. Summary of November 2017 External T.I. 2017-0712141E5 F under s. 20(1)(c)(i).