In effect, it is for the Canadian resident corporation that owns shares in a foreign affiliate, which has earned surplus and is now at a stage where it's repatriating it to Canada. If it makes an upstream loan that remains outstanding to its Canadian corporate parent indefinitely, then the effect and the intent of the upstream loan rule is to treat it as a dividend distribution and the tax consequences follow from that. The exception to that is if the upstream loan is relatively short term, i.e., is repaid within a two-year period, then the tax policy and the rules would respect the loan as a loan.
Usually the tax consequences are to impose additional Canadian tax at that time to reflect the fact that the Canadian tax rate exceeds the foreign tax burden on the earnings that were repatriated. However, in circumstances where the reason for the upstream loan is driven by foreign tax and commercial implications and not Canadian tax planning, and there is underlying exempt surplus in the system, then the effect of the rule would be to treat the upstream loan, if it remained outstanding for more than two years, as a dividend distribution. There would be offsetting deductions, just as there are in the case of any Canadian multinational. When they receive exempt surplus back from their foreign affiliates, we don't impose any additional tax on that.