11 April 1983 Income Tax Severed Letter RRRR72 - Foreign affiliate project LA 5601-C3

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.

XXX

In general, where a taxpayer is carrying on an active business or active businesses outside of Canada via a controlled foreign affiliate or controlled foreign affiliates, income from property or an inactive business of a controlled foreign affiliate will in most cases, be considered to pertain to or be incident to the active businesses Subparagraph 95(2)(a)(i) will therefore include this income in active business income thereby excluding it from foreign accrual property income. Where a taxpayer's foreign affiliates are carrying on active businesses outside of Canada it will only be in unusual situations where there will be foreign accrual property income such as:

• 1. the investment of funds that are clearly in excess of the needs of the foreign operations in total (see I.T. 73R3 [IT-73R3], paragraph 9),
• 2. amounts that are deemed to be foreign accrual property income by specific provisions of the Act, and
• 3. capital gains realized on assets that were not used to earn active business income.

Income from property or an inactive business of a controlled foreign affiliate should be viewed within the context of the total operations of all of the taxpayer's controlled foreign affiliates as if this consolidated entity is a Canadian-controlled private corporation. If, on this basis, the income would not be considered eligible for the small business deduction because it is not income from an active business or incident to an active business then it could be considered to be foreign accrual property income.

While we have answered your f.a.p.i. enquiry we are concerned as to the real nature or status of this company. From a review of the financial statements XXX it appears that decisions are being made in Canada which would suggest that central management and control is here or that it is merely an agent of the XXX. Either approach, if correct would tax the company's profits in Canada. We would suggest therefore that someone take a look at the file from this perspective and if on further investigation evidence is found to suggest that either approach might be supportable, the case be referred to Tax Avoidance.

If there are any enquiries in respect to our comments in this memorandum please contact David Burton at 996-9986.