CRA confirms that capital gains cannot constitute s. 95(2)(a.1)(iv) income

Although CRA notes that the foreign accrual property income definition specifically contemplates some overlap between variables A and B, that overlap is with respect to gains on income account and not capital gains.

Where the foreign affiliate disposes of the property on capital account (in this case, an intangible sold to the ultimate Canadian parent of the Canco holding the foreign affiliate), the two categories do not overlap, so that the gain will be dealt with under the capital gains component of FAPI (variable B) and not the component (variable A) dealing inter alia with income from a business other than an active business (notwithstanding that the taxable capital gain would come within the wording of s. 95(2)(a.1)(iv) if it were considered to “pertain to” or be “incident to” such a business.)

Neal Armstrong. Summary of 25 October 2016 Internal T.I. 2016-0658241I7 under s. 95(2)(a.1)(iv).