Special rules (and gaps in the rules) apply where CFAs have debts forgiven or deferred

In determining whether a debt owing by a foreign affiliate is a “commercial debt obligation” for purposes of the debt forgiveness rules, the test is whether any interest paid on the debt would be deductible against foreign accrual property income (FAPI). The forgiven amount cannot be applied to reduce the various tax attributes of the debtor, and will either be applied against any foreign accrual property losses or be carried forward to reduce any future year FAPLs.

2002-0165195 … provides that the "exempt earnings" or "taxable earnings" would not pick up forgiveness of a commercial debt obligation that did not relate to FAPI and that 5907(2)(f) would not be available, thus resulting in such income not being included in the exempt or taxable surplus of the FA debtor. … [T]his position is questionable given Regulation 5907(2)(f) and the definition of "earnings" in Regulation 5907 and may give rise to double taxation.

Assuming that an amount is not recognized as foreign accrual tax (FAT) until it is paid, COVID-related deferrals of tax payments in foreign jurisdictions will generally reduce the Canadian taxpayer’s FAT deduction in computing FAPI by four times the amount so deferred, thus potentially giving rise to Canadian taxes.

Neal Armstrong. Summaries of Marc André Gaudreau Duval and Michael N. Kandev, “Foreign Affiliate Issues in Troubled Times,” International Tax (Wolters Kluwer CCH), No. 112, June 2020, p. 1 under s. 95(2)(g.1), s. 248(27), Reg. 5907(2)(f) and s. 91(4).