Making an s. 95(12) election may permit a Canadian to benefit from having active business income in its cell of a cell company

The tracking interest rules in the 27 July 2018 draft legislation can apply inter alia to cell companies for which 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. (LLC membership agreements can be drafted to produce a somewhat similar effect.)

In the absence of an s. 95(12) election, the general effect of s. 95(10) is that foreign accrual property income (FAPI) is allocated (pursuant inter alia to Reg. 5904) to the Canadian cell holder taking into account its dividend entitlement. 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.”

These issues can be addressed or alleviated by making the s. 95(12) election to effectively deem the relevant cell to be a separate corporation. One of the potential advantages of making this election that is not mentioned in the Explanatory Notes is that the Canadian’s cell may earn active business income and disproportionately low FAPI, so that the FAPI pickup of the Canadian may be lowered if it comes exclusively from the Canadian’s cell.

Neal Armstrong. Summaries of Nathan Boidman, “Canada Targets Conduits and Tracking Shares,” Tax Notes International, September 17, 2018, p. 1223 under s. 95(9) and s. 95(12).