Finance official suggests that the expanded U.S. earnings stripping rule should not adversely affect the operation of s. 95(2)(a)(ii)

Among the requirements for s. 95(2)(a)(ii) to deem interest paid by a foreign affiliate to be active business income is that the interest be deductible in computing the amounts prescribed to be the income of the payer from an active business. U.S. tax reform has placed further limitations on interest deductibility.

Dave Beaulne (who recently had moved over to Finance from CRA) indicated that he expected that the current CRA position respecting Code s. 163(j) would apply here as well, meaning that if interest is denied under s. 163(j) (as expanded under the new rules) but is allowed to be carried forward indefinitely, it should be possible to recharacterize it under s. 95(2)(a)(ii).

If interest is permanently denied, under say the hybrid rule, that should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j). However, both were really questions for CRA to address in a ruling.

Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.6 under s. 95(2)(a)(ii)(B).