Elimination under s. 95(9) of benefit of there being one business with over 5 employees (pp. 1224-1225)
If an FA carries on more than one business that might be an investment business, the fact that it employs just six people would not be sufficient to disqualify it from the definition. Instead, it must employ more than five individuals per business — therefore, more than 10 for two businesses… .
The proposed rules would eliminate, for tracked interests, the potential benefits of finding that there is one business. New section 95(8) ITA identifies the existence of tracked shares and the property or activities to which they track, and new section 95(9) ITA would deem each center to be a separate business (if the law did not do so already) that would qualify as an investment business and produce FAPI.
Previous use of cell companies for controlled foreign affiliate (CFA) avoidance (p. 1225)
…CFA avoidance arrangements surfaced years ago in places such as Bermuda, the British Virgin Islands, and the Cayman Islands and are often referred to as cell companies. Each cell is a class of shares that tracks to specified property or activities, and each is insulated from the liabilities of all the other cells of the corporation. If this structure were used by Canadian parties, even though FA status would arise, there would presumably be enough parties to avoid CFA status.
Avoidance of pro rata recognition of FAPI where s. 95(12) election (p. 1226)
The … section 95(10) ITA … rule simply wipes out the avoidance of attribution and — using the rules in sections 91(1) and 95(1) ITA and section 5904 of the ITR — attributes FAPI in proportion to the overall dividend entitlement in the deemed CFA.
However this base rule can create FAPI computational issues when there is insufficient information on some cells, create CFA status when it would not arise if the cell was a separate corporation, or cause a Canadian to pick up a pro rata share of the corporation's FAPI whether or not it arises from the Canadian's cell… .
[The s. 95(12)] rules appear to deem the relevant cell to be a "separate corporation" — the actual phrase in the proposal — so that the holders of the shares of that cell become the shareholders of that separate corporation, which is deemed to own the income from the property and activities of the relevant cell. Then, the rules attribute the FAPI of that deemed separate corporation to the relevant shareholders if — applying the rules in section 93.2 ITA — that separate corporation is a CFA of the electing party….
Example of Canco benefiting from s. 95(12) election if its cell earns significant business income (p. 1226)
Canco owns all the shares of Cell A, one cell in a cell corporation. Cell A earns $2,000 of FAPI and $1,000 of active business income in 2019. All other cells combined earn $7,000 of FAPI and no active business income. Therefore, Canco is entitled to $3,000 if all $10,000 is distributed by the cell corporation to all the shareholders at end of 2019 — or 30 percent of the entire distribution. The total FAPI of the cell corporation is $9,000. …
Under proposed section 95(10) ITA — assuming no section 95 (11) ITA election — Canco's share of the FAPI will be $2,700 using the mechanical rules in sections 91 and 95(1) ITA and section 5904 ITR: The participating percentage under section 5904 ITR is 30 percent and therefore the attributable FAPI under section 91(1) ITA is 30 percent of $9,000 or $2,700.
If Canco elects the proposed section 95(11) and 95(12) ITA regime – which treats Cell A as a separate corporation entirely owned by Canco – Canco’s participating percentage is 100 percent and its section 91(1) ITA attribution will be 100 percent of $2,000.
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