Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Application of paragraph 95(2)(b) to a particular fact pattern
Position: Paragraph 95(2)(b) would apply
Reasons: Fact pattern clearly falls within the scope of the provision
2002 TEI Round Table
Question 14
Services as Non-Active Business Income
In Technical Interpretation 9622935 (November 25, 1996), CCRA seemingly indicates that, in certain non-arm's-length situations, paragraph 95(2)(b) will not apply. Consider the following circumstances:
Canco, a Canadian corporation, is a wholly owned subsidiary of ParentCo. ParentCo is a large Canadian Financial Institution. Canco is licensed to provide discretionary investment management and custodial services to Canadian resident clients (e.g., pension plans). Canco is not licensed to carry on investment management services in a jurisdiction other than Canada. Subject to Canadian securities regulations, Canco may appoint investment sub-advisers to manage, with discretionary authority, all or a portion of the assets in its clients' accounts.
ForeignCo is a controlled foreign affiliate of ParentCo. ForeignCo is licensed under foreign securities laws and regulations to carry on an independent business with its own employees that provide discretionary investment management and custodial services to third-party clients. ForeignCo is not licensed in Canada, however, to provide discretionary management services directly to Canadian residents; it is permitted to act as a sub-adviser to a licensed Canadian adviser.
Canco appoints ForeignCo as a sub-adviser for non-Canadian securities and enters into a bona fide subcontract, comparable to that which ForeignCo would enter into in providing services to arm's-length parties. Pursuant to the subcontract arrangement Canco pays a fee to ForeignCo.
Does paragraph 95(2)(b) apply to the subcontract fee paid to ForeignCo? Would CCRA elaborate on the factors to be considered in determining whether paragraph 95(2)(b) applies?
CCRA Response
The fact pattern described above would clearly fall within the scope of paragraph 95(2)(b) because the business of Canco is carried on in Canada and the fee is deductible in computing the income of Canco from that business. However, there may be circumstances where a taxpayer carries on more than one business and one of such businesses is carried on entirely outside Canada. In such case, fees paid by the taxpayer to a controlled foreign affiliate which are deductible in computing the income from the business which is not carried on in Canada would not be subject to paragraph 95(2)(b).
As a result of our review, it is our opinion that the comments in Technical Interpretation 9622935 are misleading and the interpretation will be rescinded.
Prepared by: Tim Kuss
International Section
Date: November 2002
File No. 2002-017395
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