CRA indicates that exempt surplus calculations must be supported by records showing that the FA’s CMC was exercised in a Treaty country

In order for the net earnings of a foreign subsidiary (FA) from an active business to be included under para. (d) of the Reg. 5907(1) definition of exempt earnings in respect of the Canadian parent (Canco), FA must be resident in a “designated treaty country” (an undefined term). CRA reiterated its position that for an FA to be so resident, it not only must be resident in the country for Treaty purposes under Reg. 5907(11.2)(a) (or under variants of that test in Regs. 5907(11.2)(b) to (d)), but its central management and control (CMC) must also be exercised there.

Furthermore, in addition to surplus calculations, Canco must keep records supporting that FA is resident in the Treaty country under the CMC test. Given that CRA considers that the situs of board meetings is not necessarily dispositive of satisfying the CMC test, such information in the records should:

include information relating to the whole “course of business and trading” of the FA and, thus, not be limited to the location of board meetings or where members of the board are resident.

Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.6, under Reg. 5907(1) – exempt earnings – (d).