16 May 2018 IFA Finance Roundtable, Q.6

Among the requirements for s. 95(2)(a)(ii) to deem interest paid by a foreign affiliate to be active business income is that the interest be deductible in computing the amounts prescribed to be the income of the payer from an active business. U.S. tax reform has placed further limitations on interest deductibility. Will this affect the operation of s. 95(2)(a)(ii)?

Finance indicated that it expected that the current CRA position respecting Code s. 163(j) will still apply, meaning that if interest is denied under s. 163(j) but is allowed to be carried forward indefinitely under the new US interest limitation rules, it should be possible to recharacterize it under s. 95(2)(a)(ii).

If interest is permanently denied, under say the hybrid rule, that should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j). However, both are really questions for CRA.

After indicating that, in the context of s. 95(2)(a)(ii), interest paid by and to a foreign affiliate whose deductibility was denied under Code s. 163(j) could nonetheless access the benefit of recharacterization as active business income under the s. 95(2)(a)(ii) rule if such interest was allowed to be carried forward indefinitely, Finance went on to indicate that interest which is permanently denied, under say the hybrid rule, should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j).