Holding a non-resident corporation through a partnership may generate FAPI, but also might convert FAPI to active business income
The interposition of a partnership between a small stakeholder and a non-resident corporation (Forco) may generate FAPI given that a partnership (including, it is thought, a non-resident one) is a taxpayer for income-computation purposes and Forco has become a controlled foreign affiliate of the partnership.
However, the interposition of partnership may also operate favourably through engaging s. 95(2)(a)(ii)(B):
[F]our arm’s-length Canadian corporations (Cancos) each own 25 percent of the shares of a non-resident corporation (Forco 1). In turn, Forco 1 owns 30 percent of the shares of another non-resident corporation (Forco 2), and Forco 1 makes an interest-bearing loan to Forco 2 to fund Forco 2’s active business. … [B]ecause none of the Cancos have a qualifying interest in Forco 2, the recharacterization rule in clause 95(2)(a)(ii)(B), for example, would not be available since each Canco would hold less than 10 percent of Forco 2 on a lookthrough basis.
Alternatively, if the Cancos formed a partnership and the partnership held the shares of Forco 1, FAPI would be determined at the level of the partnership. In this case, the partnership would have a 25 percent indirect interest in Forco 2 and would therefore have a qualifying interest in Forco 2. In that case, the recharacterization rule in clause 95(2)(a)(ii)(B) may apply … .
Neal Armstrong. Summaries of Ilia Korkh and Eivan Sulaiman, “Outbound Partnerships: FAPI in Unexpected Places,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 10 under s. 91(1) and s. 95(2)(a)(ii)(B).