No RAIFE carve-out for ss. 95(2)(a) and 95(2)(a)(ii)(D) amounts (p. 14)
- A controlled foreign affiliate’s interest and financing expenses (“IFE”) that is deductible in computing its income (or loss) and that is re-characterized under s. 95(2)(a), or interest described in s. 95(2)(a)(ii)(D) that is paid by the affiliate to another affiliate (and thus is not deductible in computing the FAPI of the payer affiliate), could still be included in computing the relevant affiliate interest and financing expense (“RAIFE”) despite the active business treatment of such amounts.
- The rules should clarify the exclusion from RAIFE any IFE of a controlled foreign affiliate that is (i) included in computing its income or loss from an active business under s. 95(2)(a); and (ii) not included in computing its FAPI by virtue of that amount constituting, to the recipient of the interest, income from an active business under s. 95(2)(a)(ii)(D).
RAIFE even where no FAPI revenues (pp. 14-15)
- RAIFE can arise where the affiliate otherwise has no FAPI revenues or IFE exceeding such revenues, so that there can nonetheless be a denial of deductions to the taxpayer.
Interpretive difficulties re lower-tier LP structures (p. 17)
- It is unclear how the EIFEL rules apply where a partnership (“LP”) is interposed between controlled foreign affiliates - e.g., where two controlled foreign affiliates (“CFA1” and “CFA2”); of Canco wholly-own LP, which wholly owns “CFA3,” with CFA3 incurring interest expense that is otherwise deductible in computing its FAPI relative to LP – given, inter alia, that LP is not a “taxpayer" (as defined in draft s. 18.2(1)) for EIFEL purposes and draft s. 95(2)(f.11)(ii)(A) provides that s. 18.2(2) does not apply for purposes of computing FAPI of a foreign affiliate.
FAPI aggregator effect of LPs
- A partnership not being wholly-owned by a taxpayer group could result in a significant administrative burden.
- For example, where Canco (subject to the EIFEL rules) owns, say, a 9% interest in a partnership (“LP”) owning a controlled foreign affiliate (“CFA”) that earns FAPI (and incurs interest expense that is otherwise deductible in computing that FAPI) then, notwithstanding that Canco only has an indirect minority interest in CFA, and CFA likely would not be a controlled foreign affiliate of Canco had Canco instead directly owned shares of CFA), the effect of the structure is that LP becomes a “FAPI aggregator” in that CFA is required to compute its FAPI vis-à-vis LP, with that FAPI being allocated by LP to its partners.
Inappropriate reduction of RAIFR for s. 91(4) deduction for Canadian withholding tax
- It is inappropriate to reduce the relevant affiliate interest and financing revenues (RAIFR) of a CFA by an amount deducted under s. 91(4) regarding Canadian withholding taxes.
- For example, where an interest-bearing upstream loan by a CFA to wholly-owning Canco is subject to Canadian withholding tax of 25%, this scenario is neutral from an EIFEL perspective since there is IFE (in Canada) and corresponding IFR (in a wholly-owned CFA) – yet, Canco would recognize IFE but no interest and financing revenues (IFR) since the RAIFR of the CFA would be fully offset by a FAT deduction, being the grossed-up deduction for the 25% Canadian withholding tax.
Relatedness by virtue of sibling status (p. 3)
- As siblings may (and often will) have limited knowledge of each other’s business affairs, they may be unable to determine if the “excluded entity” exception applies.
Relatedness under s. 251(5)(b) (p. 6)
- If, for example, a corporation agrees to sell a subsidiary to a purchaser, that purchaser becomes related to that subsidiary and all other related corporations during the agreement’s currency.
- It would be appropriate for para. (a) to be amended so as to be read without reference to s. 251(5)(b).
Arbitrary nature of the (c)(iii) tests (pp. 4-5)
- The s. (c)(iii) requirements for the “domestic” exception can cause an entity to qualify or not qualify as an “excluded entity” for arbitrary reasons.
- Example 1. Canco, a wholly domestic public corporation (e.g., $100M value), has a small (e.g., $5M value) wholly owned subsidiary, Subco 25% of whose shares are purchased by a non-resident investor, thereby causing the entire Canco group to cease to qualify under the domestic exception – whereas if the non-resident investor instead subscribed for the shares of Subco indirectly through a Canadian resident subsidiary, then Canco’s excluded entity status would not be lost.
A(D)(a) should be permitted to be a negative number (p. 7)
- In order to permit the carry back or carry forward of losses sufficient to fully offset taxable income in another taxation year, it should be clarified that Variable (A)(D)(a) can be a negative amount of taxable income in determining ATI where there is a loss carryback or carryforward.
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