CRA rules that a US sub servicing the collection of both its own debt portfolios and that of a U.S. sister was a good mothership to the sister

A Canadian corporation has a U.S. business of purchasing and collecting defaulted or other higher risk debts which, for risk management and state licensing reasons, it carries on through multiple U.S. subsidiaries. However, at least in the case of the “FA5 Subsidiaries,” all the work is done by the (apparently numerous) employees of their sister, FA4. CRA ruled that s. 95(2)(a)(i) deemed the income of one of the FA5 Subsidiaries to be active business income (and an addition to its exempt surplus).

This likely does not represent a reversal of 2000-0044387 (see also 9622545), where a U.S. sub, which only carried on the management of the respective real estate development properties of other U.S. subs, was found not to be eligible for s. 95(2)(a)(i) treatment because its management business would have been separate from the development businesses even if it had held the properties directly. Here, FA4 also held distressed debt portfolios of its own, albeit partly through a subsidiary LP – and one of the conditions for the CRA ruling was that LP qualified as a partnership for ITA purposes. Thus, the management and debt collection activities of FA4 may have been regarded by CRA as an integrated business.

Neal Armstrong. Summary of 2015 Ruling 2015-0573141R3 under s. 95(2)(a)(i).