CRA finds that compliance with the arm’s length standard does not oust the FAPI base erosion rules

A Canadian public company received and paid for R&D work done for its benefit by direct and indirect wholly-owned U.S. subsidiaries. It unsuccessfully argued that the fee income to these subsidiaries was not foreign accrual property income to it under s. 95(2)(b)(i)(A) because the fees paid by it satisfied the arm’s length standard in s. 247(2). The Rulings Directorate stated:

Paragraph 95(2)(b), as well as the other FAPI base erosion rules under paragraphs 95(2)(a.1) to (a.4), were enacted before the current transfer pricing rules … [and] we see no inconsistency and no operational conflict in the combined application of these two sets of rules … .

They also noted that there were issues to address in determining whether and to what extent the Canadian company would be entitled to a foreign accrual tax deduction for U.S. taxes of the subsidiaries, but that it was premature to address those issues given the stage of the file.

Neal Armstrong. Summaries of 1 February 2018 Internal T.I. 2016-0671921I7 under s. 95(2)(b)(i)(A), s. 95(3)(b), s. 95(3)(d) and Reg. 5907(1.3).