The Explanatory Notes on s. 247(2.1) do not reflect the text

The Explanatory Notes to s. 247(2.1) indicate that where Canco makes a loan at 1% to a non-arm’s length (non-CFA) non-resident, s. 247(2) operates first to deem the interest rate to be increased to the arm’s length rate of 3% - then s. 17 is applied second, and has no application since 3% is a reasonable rate for s. 17 purposes.

But that’s not what s. s. 247(2.1) says. S. 247(2) adjustments (under s. 247(2.1)(b)) are stated to operate only on “initial amounts”, which are defined as the amounts “determined for purposes of the Act” (without regard to ss. 247 and 245). Does that mean, for example, that s. 17 is to be applied first (to increase the interest rate from 1% to the prescribed rate of 2%), with s. 247(2) then applied second (to increase the s. 17 rate of 2% to the arm’s length rate of 3%)? (This approach would generate a lower s. 247(3) penalty.)

Next, there is s. 247(2.1)(c), which states that the amounts as adjusted under s. 247(2) are then to be subjected to the provisions of the Act (other than ss. 247(2) and 245(2)). What does this mean, given that all the provisions of the Act (other than GAAR) have already been applied to make any dollar adjustments (although there would still be room for character adjustments)?

It is clear from proposed subsection 247(2.1) that in calculating the “initial amounts,” it is intended for some provisions of the Act to apply only after the subsequent application, where applicable, of adjustments under subsection 247(2). But the legislative test does not provide any clarity as to which provisions apply and which do not in determining the “initial amounts.”

Neal Armstrong. Summary of Marc Roy, “Proposed Transfer Pricing Ordering Rules,” International Tax (Wolters Kluwer CCH), December 2019, No. 109, p. 3 under s. 247(2.1).