The revised stub-period FAPI rules raised a double-taxation issue

The focus of both the currently-proposed stub-period foreign accrual property income rules and those proposed over a year ago was on the situation where the percentage interest (now referenced by the concept of participating percentage rather than surplus entitlement percentage) of a taxpayer in a foreign affiliate with FAPI decreases in a year, so that there is a deemed year end and recognition by it of its share of the FAPI that accrued up to that point. In the 2016 draft rule, draft s. 91(5) also provided elective relief in some situations where there was an increase in the percentage interest of another taxpayer in the foreign affiliate with FAPI, so that there could be an exclusion from its income for the portion of the FAPI of that FA that accrued in the stub period while it had a lower percentage interest. Subject to transitioning, draft s. 91(1.5) rule has been removed from the revised draft s. 91(1.1) et seq. rules. This was potentially problematic:

The technical notes say that the concept of connected corporation now includes non-arm's-length corporations as described above, which makes unnecessary subsection 91(1.5) in the 2016 draft. However, subsection 91(1.5) in that draft applied to all taxpayers, not just corporations. Hence, under the 2017 draft, the same stub-period FAPI is now taxed twice—in a taxpayer that has a PP decrease, and in another arm's-length non-corporate taxpayer (such as an individual or a trust) that has a PP increase.

However, as subsequently noted by the authors, the October 25, 2017 Notice of Ways and Means Motion likely addresses this issue by replacing the definition of "connected corporation" by "connected person" (defined in draft s. 91(1.3).)

Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Revised Stub-Period FAPI", Canadian Tax Highlights, Vol. 25, No. 10, October 2017, p. 3 under s. 91(1.2).