CRA appears to apply an indirect use test to the s. 17(8.1)(b) safe harbour

S. 17(8.1)(b) provides a safe harbor from interest imputation on a non-interest bearing loan made by a Canco to a CFA ("CFA 3") if (among other requirements) the loan proceeds were used by CFA 3 to repay an amount owing by it for previously acquired property used principally for earning active business income. CRA has found that this requirement was satisfied where this refinanced loan originally was made by another CFA of Canco (CFA 1) to CFA 2, with CFA 2 using the loan proceeds to purchase the shares of CFA 3 (so that the interest on the loan was deemed to be active business income under s. 95(2)(a)(ii)(D)), and with CFA 2 then being merged into CFA 3 with CFA 3 as the survivor - so that the loan was assumed by CFA 3.

CRA stated that "because the assets of CFA 3 were used principally for the earning of income from an active business," the loan assumed by CFA 3 on the merger "was in respect of assets previously acquired by CFA 3 in the course of carrying on an active business." Although cryptic, CRA seems to consider that because the CFA 3 shares previously acquired by CFA 2 with the loan proceeds were "in respect of" the active business assets of CFA 3, the loan after its assumption by CFA 3 qualified as an amount owing in respect of the (indirect) acquisition of those active business assets.

Neal Armstrong. Summary of 5 June 2015 Memo 2015-0569061I7 F under s. 17(8.1)(b).