CRA indicates that the s. 125.7(4)(d) election is not available for a multi-tiered chain of entities that are not dealing with each other at arm’s length
Para. (d) of the definition of “qualifying revenue” excludes from that term amounts derived by the eligible entity from persons or partnerships not dealing at arm’s length with it (“NAL entities”). However, s. 125.7(4)(d) provides an exception. For example, s. 125.7(4)(d) could permit a management company, that has steady year-over-year management fees earned exclusively from a NAL entity, to benefit from the CEWS (wage subsidy) if it makes a joint election with that entity and the latter has a significant decline in qualifying revenue.
CRA has indicated that s. 125.7(4)(d) was not available in the situation where all of Canco’s revenues were derived from manufacturing and selling products to Forco A which, in turn, finished the products and sold them to Forco B (which, like Forco A, was a related foreign corporation), for sale to arm’s length customers. The reason is that Forco A was the only NAL entity from whom Canco directly earned qualifying revenues (and, thus, the only entity with which it could elect), and Forco A had no qualifying revenues because all of its revenues were earned from a NAL entity (Forco B).
CRA extrapolated from this example, stating:
[T]he election in paragraph 125.7(4)(d) may not be made by a multi-tiered structure or chain of entities that are not dealing with each other at arm’s length.
Essentially the same statement was added on October 6 to the CRA FAQ CEWS webpage (Q.8-02), without garnishment with the above or any other factual example.
Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0851731E5 under s. 125.7(4)(d).