The cashless application of cross-border interest payments (owing Canco to USCo) to satisfy a subscription obligation for shares of Canco is targeted to generate interest deductions in Canada and no income inclusions in the U.S.

A technique for a U.S. corporation ("USCo") to use double-dip financing of an acquisition of Canadian "Target" starts in a conventional manner with a Canadian acquisition vehicle ("Buyco") being capitalized by it with interest-bearing debt and equity in conformity with the Canadian thin cap rule and with Buyco ultimately being amalgamated with Target to form Canco. However, before the amalgamation, a three-party arrangement is entered into among USCo, Buyco and an LLC sub of USCo under which

• USCo will direct Buyco (or its successor, Canco) to satisfy its interest obligations as they come due by paying the interest amounts to LLC in satisfaction of its obligations under a forward sale agreement ("FSA") to subscribe for membership interest in LLC in equal amounts (with this FSA also containing a matching obligation to subscribe for a further membership interest when the principal of the loan comes due), and
• LLC will redirect that Canco instead retain those amounts on account of the subscription price for shares of Canco under a similar FSA between LLC and Buyco — so that Canco issues shares to LLC.

The targeted results are for the loan to be treated as equity for Code purposes (so that the shares issued by Buyco/Canco are treated as a tax-free stock dividend – and so that USCo can enjoy a U.S. interest deduction for any related financing), and for it to generate an interest deduction for Canadian purposes (with no withholding).

Neal Armstrong. Summary of Jack Bernstein and Francesco Gucciardo, "Update on Canada-U.S. Merges and Acquisitions," Tax Notes International, March 16, 2015, p. 993 under s. 20(1)(c).