CRA reconfirms that "directly or indirectly" wording in s. 95(2)(a) covers back-to-back loans

CRA has reconfirmed (referring to a published statement of Wally Conway at the Department of Finance) that "the words "directly or indirectly" in subparagraph 95(2)(a)(ii) are meant to deal with back-to-back loan arrangments," so that, for example, interest paid by a CFA (which is engaged in an active business) indirectly "through" an intermediate non-resident company under such a back-to back loan arrangment to a CFA Finco may be recharacterized as active business income to Finco.  However, that policy was not applicable here to an interest-bearing loan made by Finco to the intermediate company (the non-resident parent of Canco) because the loan, in turn, made by the parent to the CFA carrying on an active business was non-interest bearing.

Neal Armstrong.  Summary of 29 June 2012 Memorandum 2012-0441601I7 under s. 95(2)(a)(ii)(B).