CRA considers that income on funds earmarked for new projects at sister FAs is FAPI

Head office considered that income from funds generated from projects of one CFA was not deemed by s. 95(2)(a)(i) to be active business income (so that it was foreign accrual property income) notwithstanding that such funds were earmarked to finance future projects in the same business line at sister CFAs.  CRA considered that the test in s. 95(2)(a)(i)(A) – that such investment income was directly related to an active business of the sisters – was not satisfied as such income could have been earned irrespective of whether it was so earmarked.

Furthermore, the test in s. 95(2)(a)(i)(B) was not satisfied: CRA considered such income would not have been active business income to the sister affiliates if it had been earned by them directly, on the basis of its jurisprudential interpretation that income on funds set aside for future expansion of a business is not income from that business.

Neal Armstrong.  Summary of 2012-0439661I7 E under s. 95(2)(a)(i).