CRA indicates that Canco may choose not to deduct interest expense of a CFA so as not to generate a FAPL
The sole activities of FA1, a wholly-owned foreign affiliate of Canco, are to use money borrowed from an arm’s length bank to buy all the shares of a corporation (FA2) carrying on an exclusively active business in a designated treaty country, and use exempt dividends from FA2 to service the bank interest and pay exempt dividends to Canco. CRA confirmed that FA1 would generate foreign accrual property losses equal to the bank interest.
Such FAPLs would generate a taxable deficit. When asked whether Canco could choose to not deduct these interest expenses (so as not to generate FAPLs), CRA responded, yes, the s. 20(1)(c) deduction is discretionary, but added that:
[I]f Canco does not deduct an amount of interest in computing FA1’s FAPI/FAPL for the year in which that interest is paid or payable, that interest may not be deducted in computing FA1’s FAPI/FAPL for any subsequent year.
Neal Armstrong. Summary of 5 June 2018 External T.I. 2017-0738081E5 under s. 95(2)(f).