It may be advantageous for a CCPC to structure so that it earns foreign source income as FAPI

It generally will be advantageous for a Canadian-controlled private corporation to earn ordinary passive income, such as a royalty, as foreign accrual property income through a controlled foreign affiliate in a jurisdiction that imposes tax at around a 25% rate, rather than directly. A 25% foreign rate is sufficient to generate a full foreign accrual tax deduction and is lower than the rate of tax paid by the CCPC on aggregate investment income.

On the other hand, it generally will be disadvantageous to have a CFA of the CCPC realize and distribute a capital gain. The reason is that the non-taxable portion of the gain (when distributed as a dividend out of exempt surplus) merely generates an addition to the CCPC’s general rate income pool rather than to its capital dividend account. There generally is a better result if the CCPC holdco for the CFA instead sells the CFA shares, as this will generate an addition to its CDA. However, a s. 93 election may be made instead if the sales proceeds are to be reinvested rather than distributed to Canadian individual shareholders.

A further alternative, where the CCPC holding the CFA is, in turn, held by another CCPC, is for the top CCPC to sell its shares of the CCPC holding the CFA. Here, similar considerations (deferral v. absolute reduction in total tax) govern the choice between accessing safe income or sticking with capital gains treatment.

Neal Armstrong. Summaries of Paul Dhesi and Korinna Fehrmann, "Integration Across Borders," Canadian Tax Journal, (2015) 63:4, 1049-72 under s. 91(4), s. 95(2)(b), s. 93(1), s. 55(2)(d), Reg. 5907(2.1).