The expansion of the FAD rules creates tension with existing FAD rules which implicitly contemplate a real non-resident parent

The Budget proposed amendment to the foreign affiliate dumping (FAD) rules would expand them to situations where the non-resident “parent” of the CRIC is a non-resident individual or a group of non-resident persons not dealing with each other at arm’s length (a “NAL group”).

The existing “more closely connected business” (“MCCB”) exception in s. 212.3(16) is simply unworkable where the deemed “controlling” person is a trust beneficiary by virtue of s. 212.3(26). In addition, s. 212.3(26)(c) (re a discretionary beneficiary having a deemed 100% interest) could deem multiple discretionary beneficiaries to each own 100% of the shares owned by the trust, leading to multiple incidence of tax on multiple deemed dividends. Given that the core premise -- that absent tax considerations, the investment in the FA would have been made by the discretionary beneficiary is almost certainly false -- s. 212.3(26)(c) should be scrapped.

Ss. 212.3(26)(a) and (b) (providing a look-through rule to non-resident trust beneficiaries) also are unnecessary – if the CRIC is controlled by a Canadian-resident trust (albeit, with non-resident beneficiaries), the CRIC will in reality be controlled by Canadian-resident decision makers.

The addition of the concept of a NAL group is fraught since identifying such a group is a difficult question of fact which it very well might be impracticable for the CRIC to determine. In addition, why should a NAL group who have gone to the trouble to negotiate a shareholders agreement for the CRIC be regarded as the real direct investors in the FA? Furthermore, the s. 212.3(16) exception would be very difficult to apply where the deemed “parents” do not exercise control.

Neal Armstrong. Summaries of Joint Committee “Foreign Affiliate Dumping, Derivative Forward Agreement and Transfer Pricing Amendments Announced in the 2019 Federal Budget” 24 May 2019 Submission of the Joint Committee under s. 212.3(1)(b), s. 212.3(16), s. 212.3(26), s. 212.3(18), s. 12(1)(z.7), s. 248(1) – tax-indifferent investor, s. 247(1.1) and s. 152(4)(b)(iii).