CRA accepts that interest-free loans by a limited partner to the LP, or to wholly-owned subs which directly or indirectly hold such LP, can be a good s. 20(1)(c)(i) current use
Folio S3-F6-C1, para. 1.55 states that, generally, a deduction for interest will be allowed if borrowed money is used to make an interest-free loan to a wholly-owned corporation or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings and the proceeds of the interest-free loan have an effect on the corporation's income-earning capacity. CRA has acknowledged extensions of this policy, for instance where a corporation uses proceeds of a bank loan to make an interest-free loan to limited partnerships carrying on business of which it is the 99.9% limited partner and a wholly-owned subsidiary is the general partner (provided it is shown that such loans “to the LPs affect [its] ability to earn income from the LPs”).
Second, regarding where the bank loan is received by a corporation at the top of a stack of corporations (e.g., by Aco, which holds Bco, which holds Cco, which holds Dco, the holder of the limited partnership interests) and Aco uses the loan proceeds to directly or indirectly make an interest-free loan to the LPs (e.g., making such loan to Dco which, in turn, makes interest-free loans to the LPs, or to Bco, with back-to-back interest free loans made all the way down the stack), CRA stated:
[I]n light of … Canadian Helicopters, the fact that the taxpayer's income is derived from dividends from stacked corporations should not be a factor that … prevents a taxpayer from relying on the direct use of borrowed funds exception to make an interest-free loan.
[I]t would be necessary to assess … whether the interest-free loans made by Aco to the LP, Bco or Dco … affect Aco's ability to earn income.
Neal Armstrong. Summary of 10 February 2022 External T.I. 2021-0912581E5 F under s. 20(1)(c)(i).