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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère
Principal Issues: Whether property income of a foreign affiliate was directly related to active business activities of another non-resident corporation to which the taxpayer and the foreign affiliate were related
Position: Question of fact. This determination generally requires full knowledge of all the facts and circumstances of an actual case.
Reasons:
xxxxxxxxxx
Attention: xxxxxxxxxx
August 24, 1999
Dear Sirs:
970134
Olli Laurikainen
(613) 957-2116
Re: Subparagraph 95(2)(a)(i) of the Income Tax Act
This is in reply to your request for technical interpretation concerning the application of the above provision. We present the following hypothetical scenario.
1) Mr. x is an individual resident in Canada.
2) Mr. X owns 100% of the shares of a foreign affiliate ("FAl").
3) FAl owns 100% of the shares of a second foreign affiliate
("FA2")
4) FAl carries on a business in the United States consisting of acquiring real estate and developing it for sale to arm's length persons. FAl employs more than five employees full time in the active conduct of this business and has at the particular time two real estate development projects under way. Three of FAl's full time employees are site supervisors.
5) FA2 has one real estate development project. FA2 was incorporated for the purpose of insulating FAl from potential liabilities associated with its real estate development project. Were it not for these concerns, the development property belonging to FA2 would have been owned and developed by FAl.
6) FA2 has no employees and every aspect of the management of its project is done by FAl's employees. Two of FAl's employees devote part of their time to managing FA2's project and one of FAl's employees, a site supervisor, devotes 100% of his time to supervising the development of FA2's project. FA2 does not contract for project management services from any other person.
7) FA2 pays FAl a fee to compensate FAl for the services rendered by it. The amount of the fee will not be less than cost to FAl of providing the services.
8) FA2 earns its income from selling lots in its project to arm's length purchasers.
Our Position
The business of FA2 would be an 4'investment business" as defined in subsection 95(1) of the Act since it does not meet the employee tests in paragraph (b) of the definition and its income would, subject to the application of paragraph 95(2)(a) of the Act be income from property. However in these circumstances, the income of FA2 from the sale of developed property Will be included in its income from an active business pursuant to subparagraph 95(2)(a)(i) of the Act if Mr. X can establish that the tests set out in clauses 95(2)(a)(i)(A) and (B) of the Act are met.
In order to satisfy the test in clauses 95(2)(a)(i)(A) and (B) of the Act, Mr. X must establish that
- The activities of FAl and FA2 can together be viewed as a single active business.
- FAl has employees who are not employed by it full time in the active conduct of its own active real estate development business and such employees spend all or part of their time conducting activities associated with the development of the project held by FA2. The services provided by the employees of FAl to FA2 comprise the full range of day-to-day activities that would have been conducted if the project held by FA2 had been held by FAl. If it were not for the fact that these services were available from FAt, FA2 would not have acquired the project and consequently would have had no income.
- FAt employs more than five employees full time in the development of its own real estate projects allowing those activities to comprise an active business in and by themselves (i.e. the activities qualify for exclusion from the "investment business" definition in subsection 95(1) of the Act)
- The segregation of FA2's property from the management of that property was not done for the purpose of a* voiding foreign accrual property income.
The employees of FAt who provide services to FA2 would not be considered to have been employed by FAt full time in the active conduct of FAt's real estate development business for the purposes of the test in paragraph (b) of the "investment business" definition in subsection 95(1) of the Act. Therefore in the above example, had FAt had only six employees, the real estate development business of FAt would have been an "investment business" as defined in subsection 95(1) of the Act for the reason that it would not have employed more than five or the equivalent more than 5 employees full time in the active conduct of that business. This is because one of its employees devotes 100% of his time to supervising or managing the development of FA2's real estate project and two other employees spend part of their time doing so and this would have left the equivalent of less than 5 employees employed full time in the active conduct of FAl's real estate development business
Our analysis above would have been the same had Mr. X, rather than FAl, held the shares of FA2.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada
We trust this is the information you require.
Yours truly,
for Director
Reorganisations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1999
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1999
Email this Content