CRA indicates that there is no exclusion in s. 15(2.1) from the application of s. 15(2) to a loan from an FA to a partnership of FAs

A partnership, whose partners (FA1 and FA2) are foreign subsidiaries of Canco, borrows money from another foreign subsidiary (FA3) of Canco in order to fund the purchase of the shares of a foreign corporation (FA4) that are excluded property. S. 93.1(4) deems the partnership to be a non-resident corporation for the purpose of applying s. 95(2)(a)(ii)(D) (effectively converting the interest paid by the partnership to FA3 into active business income), but does not deem the partnership to be a non-resident corporation for s. 15 purposes.

S. 15(2.2) provides that s. 15(2) does not apply to indebtedness between non-resident persons, and s. 15(2.1) provides an exception to s. 15(2) respecting certain foreign affiliates that are debtors, but these exceptions do not specifically deal with a partnership. Does s. 15(2) apply in this situation, so as to generate FAPI?

CRA noted that ss. 15(2) and (2.1), in various places, specifically extend their application to partnerships, but that there is only a reference to a person, and not a partnership, when dealing with the carve-outs in ss. 15(2.1)(a) and (b) regarding dealings with foreign affiliates.

Accordingly, in this situation, there is a policy concern that has been brought to the attention of the Department of Finance.

Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.8 under s. 15(2.1).