Entity-by-entity application of test (p.9)
- The test of all or substantially all of the businesses, undertakings and activities of each eligible group entity in respect of the taxpayer being carried on in Canada throughout the entity’s taxation year appears to apply on an entity-by-entity basis, so that the failure of the test by even an insignificant group entity will cause the whole group to not qualify for the domestic exception.
Exceeding of $5M threshold even where small FA interest or stacking of FAs (p. 9)
- The test of the total fair market value of all property of a foreign affiliate of the taxpayer or of an eligible group entity in respect of the taxpayer not exceeding $5 million applies irrespective of whether the taxpayer has a 10% interest or 100% interest in the foreign affiliate.
- Even an insignificant interest in a special class of shares causing a non-resident corporation to be a foreign affiliate, would require the fair market value of its property to be considered in applying the $5 million threshold.
- There is no exclusion for shares of another foreign affiliate in determining the fair market value of the property of a foreign affiliate, which may lead to double counting.
Likely requirement to hold a share (pp. 10-11)
- Presumably the position in 2019-0798831C6, that a person must own at least one share of a corporation to be a specified shareholder (as defined in s. 18(5)) of the corporation would apply, so that where an eligible group entity has a Canadian-resident specified shareholder not dealing at arm’s length with a non-resident person (e.g., a Canadian-resident specified shareholder has a non-resident subsidiary), this would not cause the group to fail to qualify for the domestic exception.
Application where share sale but not asset sale (pp. 11-12)
- Where, for example, a Canadian-resident taxpayer has a subsidiary that causes it to not meet the domestic exception (in para. (c) of “excluded entity”), e.g., because of a non-Canadian business or the holding of a significant foreign affiliate, s. 18.2(9) would apply if the taxpayer sold its shares of the subsidiary to an arm’s length person so that it could qualify for the domestic exception, so that the subsidiary would be deemed to remain an eligible group entity.
- If there instead was a direct sale by the subsidiary of its non-Canadian business or of its shares of the foreign affiliate, s. 18.2(9) would not apply because there was no change to the entities which were eligible group entities in respect of the taxpayer.
Reduction for FAT claims in future years (p. 20)
- The inclusion under para. (g) of the interest and financing revenues definition of the relevant affiliate interest and financing revenues (“RAIFR”) of a controlled foreign affiliate of the taxpayer, is generally reduced by any deduction under s. 91(4) in respect of foreign accrual tax to the extent that it relates to the RAIFR, even where there is a deduction under s. 91(4) in a subsequent taxation year – so that taxpayers may be required to estimate their foreign accrual tax deductions that will be claimed in subsequent years.
Application of RIFE first (p. 30)
- A taxpayer’s excess capacity (generally arising where the maximum amount a taxpayer is permitted to deduct in respect of IFE for the year exceeds its actual IFE for the year) and received capacity (representing the cumulative unused excess capacity of eligible group entities that has been transferred to it under s. 18.2(4)) are reduced automatically to the extent of its restricted interest expense, or RIFE (tracking the IFE of a taxpayer that has been denied under
- the EIFEL rules).
- Effectively, this means that such excess and received capacity must be applied against prior-year RIFE before the taxpayer can transfer its excess capacity to another group member or use its received capacity to deduct its excess IFE for the current year.
Requirement for accuracy (p. 34)
- Any over-designation, including an immaterial one, will invalidate a transfer of excess capacity under s. 18.2(4).
- An amended election may be filed, but only as provided in s. 18.2(4)(i).
Zero tolerance for errors (p. 39)
- Under s. 18.21(2), if an election is made that allocates an amount greater than the specified limits, the allocated group ratio amount will be deemed to be nil – a potentially punitive result for what might be a small error.
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