Various Canada-U.S. hybrid structures may still be viable following the proposed Regs under Code s. 385
One of the hybrid structures for the double-dip financing of a U.S. operating subsidiary (“U.S. Opco”) of Canco is for Canco to fund a Lux SARL with MRPS (as to which Luxembourg “has now started again on a limited basis” to issue rulings) or a non-interest-bearing loan (as to which Luxembourg would impute an interest deduction). The MRPS would be targeted to give rise to exempt dividends in Canada - or the loan would be targeted to not be subject to s. 17 interest imputation. The SARL would make an interest-bearing loan to U.S. Opco, the interest on which would be exempt from U.S. withholding under Art. XI of the Canada-U.S. Treaty and would be excluded from FAPI treatment by s. 95(2)(a)(ii).
This and a number of other Canada-U.S. hybrid structures (forward subscription arrangements for a USCo financing of Canco, a tower or repo structure for the financing of U.S. Opco by Canco or a hybrid debt financing by a U.S. lender of a Canadian realty company that has the economics of a share investment) very well may not be hurt by the proposed Regs under Code s. 385 to reclassify debt as equity in various circumstances.
Neal Armstrong. Summaries of Jack Bernstein and Francesco Gucciardo, "Canada-U.S. Hybrid Financing – A Canadian Perspective on the U.S. Debt-Equity Regs,” Tax Notes International, 26 September 2016, p. 1151 under s. 95(2)(a)(ii) and s. 20(1)(c).