CRA indicates that unpaid simple interest that is deemed to be a loan by s. 78(1)(b)(ii) generally is not outstanding debts to specified non-residents

The thin cap rules apply to “outstanding debts to specified non-residents”, whose definition specifies that there is deductible interest paid or payable on them. Where the Canadian debtor and the non-resident creditor make an s. 78(1)(b)(ii) agreement to deem the amount of simple interest owing by the one to the other to be a loan, CRA generally considers that the amount of the deemed loan would not be an outstanding debt to a specified non-resident for the purposes of ss. 18(4) and (5) until the compound interest is paid and thereby becomes deductible under s. 20(1)(d).

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.4 under s. 18(5) - outstanding debts to specified non-residents - s. (a)(ii).