The object of the FABI rules would be better met if the FABI definition were expanded

The “relevant tax factor” (RTF) proposals released on August 9, 2022 would have subjected all foreign accrual property income (FAPI) and “taxable surplus” of foreign affiliates (FAs) of CCPCs to an RTF of 1.9 (instead of 4), so as to tax all FAPI and taxable surplus of such FAs at 52.63% rather than 25%.

However, to address the issue that some FAPI and taxable surplus amounts would not be aggregate investment income (AII) if earned in Canada by a CCPC, the revised RTF proposals of August 12, 2024 introduced the concepts of “foreign accrual business income” (FABI) and “FABI surplus,” which effectively are types of FAPI and taxable surplus which continue to be subject to an RTF of 4, provided that timely elections are made.

However, FABI (under the s. 93.4(1) definition) only includes:

• services income under s. 95(2)(b)(i), when specified conditions are met; and
• income from a business of developing real estate for sale, or leasing of real estate or other immovable property, that is an “investment business” but would not be an “investment business” if it were possible to meet the “five full-time employees (or equivalent)” test by counting services performed in Canada by other members of the corporate group.

The definition of FABI surplus, which in addition to FABI and certain other amounts, includes an FA’s net earnings or net loss from an active business carried on by the FA in a country, would, for example, address the situation where an FA is carrying on an active business in a foreign treaty country but is earning taxable surplus because its central management and control is in Canada.

The definition of FABI does not capture income from the following, which also would not be AII where earned in Canada by a CCPC:

• an adventure in the nature of trade;
• the active trading of securities, currencies, or commodities;
• the business of insuring or reinsuring risks;
• services deemed to be FAPI under s. 95(2)(b)(ii);
• the business of disposing of Canadian or foreign resource properties;
• the business of developing real estate for sale with insufficient employees;
• the business of leasing property other than real property with insufficient employees; and
• a non-qualifying business.

Neal Armstrong. Summary of Christopher Montes, John Farquhar, and Evan Raymer, “Mind the Gap: FABI Relief Falls Short for CCPCS,” International Tax Highlights (IFA), Vol. 3, No. 4, November 2024, p. 2 under s. 93.4(1) - FABI.