The new CRA Organschaft policy may engage s. 95(2)(a)(ii)(D)

In an “Organschaft” a German parent and its German subsidiary agree for Subco to annually transfer its entire accounting profit to the parent, and for the parent to compensate for any loss sustained by the subsidiary. At 2016 IFA Roundtable, Q. 6, CRA confirmed that, at least in the simple case of a wholly owned subsidiary with one class of shares, the annual profit transfers will be deemed to be dividends under s. 90(2) – in replacement of an earlier position (e.g., 2001-0093903) that a profit transfer payment made by Subco to Parentco could be re-characterized as active business of Parentco under s. 95(2)(a)(ii) to the extent that Subco had earnings from an active business – so that this previous position can apply only to profit transfer payments made before 2017.

It is unclear whether the new view will apply where the taxpayer has elected under Reg. 5901(2)(b) for s. 90(2) to apply retroactively to distributions made by the German sub after December 20, 2002. Furthermore:

For structures that are funded with a loan from a financing FA to the German parent, the financing FA's interest income, under the CRA's new position, is now subject to the recharacterization requirements in clause 95(2)(a)(ii)(D) instead of those in clause 95(2)(a)(ii)(B). Clause D requires that the German subsidiary's shares be excluded property; thus, the subsidiary's excluded property status must be regularly reviewed and monitored.

Neal Armstrong. Summary of Melanie Huynh and Paul Barnicke, "German Organschafts", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 5 under s. 90(2).