CRA finds that the fresh start rule generated deemed ECE for licensed IP of an acquired FA

Canco acquired a non-resident corporation (FA2) which was engaged in a non-Canadian business of licensing intellectual property to third parties and also to a subsidiary (FA3) for use in its active business. FA2's business was deemed to be a separate non-active business under s. 95(2)(a.3), as the IP came within the extended definition of "lease obligations."

Headquarters concluded that there was a deemed eligible capital expenditure on the IP under the fresh start rule notwithstanding a number of ambiguities, including the fact that the ECE definition requires that there be an "outlay or expense ... as a result of a transaction," which did not "mesh well" with the deemed acquisition of the IP at FMV under the fresh start rule.

Although the fresh start rule would not have applied if FA2 instead had been merely earning income from property, Headquarters noted that "the threshold amount of activity that is required to cause any corporation (including a FA) to be considered to be carrying on business is extremely low."

Neal Armstrong. Summary of 31 July 2014 Memo 2014-0536581I7 under s. 95(2)(k).