5 September 2002 External T.I. 2000-00742

FA1 lends money to FA2 (a Swedish company) which uses the borrowed funds to acquire the shares of FA3 (another Swedish company) whose sole source of income is related company receivables giving rise to interest that is recharacterized as active business income under s. 95(2)(a)(ii). FA3 makes an asset transfer to FA2 which is deductible to FA3 and includable in the income of FA2 under Swedish income tax provisions providing for income transfers.

Clause 95(2)(a)(ii)(B) does not apply to the asset transfer payment because, under Canadian income tax law, the transfer payment would not be deductible in computing the income of FA3 under the provisions of the Act.

FA1 lends money to FA2 (a Swedish company) which uses the borrowed funds to acquire the shares of FA3 (another Swedish company) whose sole source of income is related company receivables giving rise to interest that is recharacterized as active business income under s. 95(2)(a)(ii). FA3 makes an asset transfer to FA2 which is deductible to FA3 and includable in the income of FA2 under Swedish income tax provisions providing for income transfers.

S.95(2)(a)(ii)(D) would not apply to the interest paid by FA2 to FA1 as such interest would only be relevant in computing the liability for income taxes of FA2.