CRA finds that a foreign affiliate which earns deemed active business income under s. 95(2)(a) does not also carry on an active business

A U.S.-dollar liability owing to Canco by its foreign subsidiary ("FA") arose as a result of a capital reduction on the FA shares (i.e., the capital reduction was owed to Canco) – with that debt later settled at a loss to Canco and a gain to FA in terms of Canadian dollars.  CRA found that s. 95(2)(i) did not apply to the settlement of the debt (to avoid FAPI to FA) on the ground that there were no "proceeds" to FA when the debt arose.  It further noted that although essentially all the assets of FA gave rise to (deemed) active business income under s. 95(2)(a), FA did not satisfy the further requirement in s. 95(2)(i)(B) that it in fact be "carrying on" an active business.

Neal Armstrong.  Summary of 27 April 2015 Memo 2014-0546641I7 under s. 95(2)(i).