BlackBerry – Tax Court of Canada finds that s. 95(2)(b)(i) is inapplicable where no net inbound services are provided, and the s. 95(3)(b) and (d) exclusions apply to integrated R&D services

BlackBerry had acquired four US companies (the “US Affiliates”) so that it could benefit from the tech expertise and services of their employees, who mostly remained in the US. The US Affiliates charged fees to BlackBerry for R&D services on a cost plus 8% basis, and BlackBerry provided service of greater value to the US Affiliates.

Bocock J indicated that s. 95(2)(b)(i) “is unclear whether only the R&D services paid for by the taxpayer are to be considered or whether all services provided between the foreign affiliate and the taxpayer should be considered.” However, a key objective of the foreign accrual property income (FAPI) regime was “to prevent erosion of the Canadian tax base”, and here there was no base erosion going on given that the cross-border services were fully reciprocal. In this light, s. 95(2)(b)(i) should be interpreted as applying “solely to situations where a net positive amount is paid from Canada to the foreign affiliate”, which was not the case here.

In the alternative, he found, in light of the broad meaning of “in connection with” and the important and ongoing role which the R&D services played in meeting the immediate demands of smartphone customers (e.g., teleco carrier testing and bug fixes), that the exclusion in s. 95(3)(d), for “services performed in connection with the … sale of goods,” applied.

The s. 95(3)(d) exclusion regarding manufacturing outside Canada applied for similar reasons, e.g., that “the product development process was indistinguishably meshed with the manufacturing process”.

In obiter, he accepted the Crown’s submission that, if the fees for the R&D services were FAPI, there was no foreign accrual tax (FAT) deduction because the CIRA (US tax credit for increasing research activities) should be wholly allocated to the US Affiliates, whose R&D activities generated the credit, rather than to the consolidated US group as a whole.

Neal Armstrong. Summaries of BlackBerry Limited v. The King, 2024 TCC 123 under s. 95(2)(b)(i). s. 95(3)(b), s. 95(3)(d) and s. 91(4).