The deeming by s. 212(3.1) of Part XIII tax on a back-to-back loan to be payable by the lender to the intermediary rather than by the intermediary may result in loss of a FAT deduction where the loan from the intermediary generates FAPI

Where a subsidiary of CanCo in a Treaty-country (Treaty Co) makes an interest-bearing loan to CanCo that is funded by a non-interest-bearing loan from a subsidiary of Treaty Co in a non-Treaty country (Non-Treaty Co), s. 212(3.1)(d) deems the interest on the loan to CanCo from Treaty Co (which generally will be foreign accrual property income) to be subject to 25% withholding.  There is a concern that CanCo will not receive a "FAT" deduction for this Part XIII tax under s. 91(4) given inter alia that s. 212(3.1) may deem this income tax to be payable by an entity (Non-Treaty Co) which did not earn the FAPI.

Neal Armstrong.  Summaries of Mark Coleman, "Treaty Shopping and Back-to-Back Loan Rules," Power Point Presentation for 28 May 2015 IFA Conference in Calgary under s. 95(1) – foreign accrual tax, s. 212(3.1)(d) and s. 212(3.1)(c).