The new s. 95(3.03) safe harbour from s. 95(2)(b)(i) raises issues as to which FA is the recipient of the inter-FA management services
Draft s. 95(3.03) would provide an exception to the application of s. 95(2)(b)(i), which otherwise would deem, say, a management fee paid by one FA to another FA in which the taxpayer also has a qualifying interest to be FAPI to the recipient FA if it was deductible in computing the payer FA’s FAPI. S 95(3.03) sets out conditions that are largely analogous to those in s. 95(2)(a)(ii)(D), so that one of the requirements is that the recipient FA of the management fee provide the related services to the FA paying the fee.
Draft s. 95(3.03) appears to arise out of a comfort letter addressing the situation where an FA (“FA 1”) of a taxpayer provides management services “in respect of” another FA of the taxpayer (“FA Opco”) carrying on an active business and whose shares are held by the taxpayer through “FA Holdco.” The management fee received by FA 1 for its services is paid by FA Holdco rather than FA Opco, because other shareholders of FA Opco are unwilling to bear the fee.
Rather ironically, s. 95(3.03) would not provide relief in the comfort letter situation if FA 1 were regarded as providing its management services to FA Opco rather than to FA Holdco. (The ITA does not, at least explicitly, have a rule similar to the ETA rule that the “recipient” of a supply generally is the person who has agreed to pay for it.)
Neal Armstrong. Summary of Silvia Wang and Clara Pham, ‘The Amended Service FAPI Rule: New Relief Available,” International Tax Highlights, Vol. 1, No. 2 November 2022, p. 8 under s. 95(3.03).