CRA comments on how to apply the more closely-connected test in s. 212.3(16) where Canco has overlapping officers with its non-resident parent

A US-resident public company (US Pubco) wholly owns US Holdco, which in turn wholly owned USCo, as well as Canco, which has foreign subsidiaries. In 2021, Canco acquired the shares of US Sub from US Holdco for FMV consideration. At the time of acquisition, Canco, Canco’s foreign subsidiaries, and US Sub carried on Business Segment 1; whereas , US Holdco carried on Business Segment 2.

Two of the three Canadian-resident senior officers of Canco, all working in Canada (the CEO and CFO) were also the CEO and CFO of US Pubco and US Holdco; and their compensation was based on the consolidated results of the group, whereas that of the third executive of Canco, who managed the day-to-day operations of Business Segment 1, was based solely on the results of Business Segment 1, which includes US Sub’s results. Conversely, the compensation of another (non-resident) executive, who managed the day-to-day operations of Business Segment 2, was based solely on the results of Business Segment 2.

In a lengthy and diffuse (it’s-a-question-of-fact) response, CRA indicated inter alia that, for s. 212.3(16) purposes:

• at the investment time, the business activities of US Sub were part of Business Segment 1 and were similar to the business activities carried on in Canada by Canco in the same business segment; therefore, the business activities of US Sub appeared to be closely connected with the business activities of Canco for purposes of the "more closely connected business activities" test in s. 212.3(16)(a);
• the “reasonably expected” test in the preamble to s. 212.3(16)(c) referenced a test “by an objective observer with knowledge of all of the pertinent facts”; and
• regarding whether it is sufficient that the performance evaluation and compensation of the officers of Canco be based on the results of the business segment of which US Sub was a part, rather than being tied specifically to the results of US Sub, CRA indicated that, for the purposes of s. 212.3(16)(c)(iii), “one must generally demonstrate that some proportion of the performance evaluation and compensation of the officers is based to some extent on the operating results of the subject corporation.”

Neal Armstrong. Summary of 2 April 2026 External T.I. 2021-0917901E5 under s. 212.3(16).