In its October 15, 2012 release of updated draft legislation (at http://www.fin.gc.ca/drleg-apl/bia-leb-1012-eng.asp), Finance eliminated the benefit of the new outbound financing rule for Canadian subsidiaries of foreign multinational corporations if a treaty applies to reduce the Canadian company’s interest income on the loan.   Under current law, if a Canadian subsidiary of a multinational group (Canco) lends funds to its non-resident parent company (or certain other non-resident companies in the group), the loan can be deemed to be a dividend subject to withholding tax, unless the loan is fully repaid before the end of Canco’s next following taxation year.  A new elective rule (s. 15(2.11)) would avoid this deemed dividend treatment for a “pertinent loan or indebtedness” (PLOI); but this comes at a cost to Canco of either actual or deemed interest income on that loan equal to the Government of Canada treasury bills rate plus 4% (“prescribed rate”, currently 5%).  However, in the October 15 release, Finance added a further rule which essentially voids (ignores) the PLOI election if Canco’s interest income on the loan is later reduced below the prescribed rate by application of a tax treaty (s. 17.1(3)).  This reduction could potentially occur if the double taxation provisions of a tax treaty are later engaged by Canco and the non-resident group borrower.  Presumably the effect of this new rule is that Canco should only elect PLOI treatment for a loan if the group does not plan to later seek a reduction of Canco’s PLOI interest income on that loan under a tax treaty.