The revised stub period accrual rules still provide unduly narrow safe harbours

The stub period accrual rules originally were motivated by situations as simple as that where foreign accrual property income of a controlled foreign affiliate of a Canadian taxpayer accrues during the first portion of the year, but the CFA then becomes a subsidiary of someone else before year end, so that none of that FAPI is required to be picked up by the taxpayer. Several observations (among many) of Angelo on the revised stub period accrual rules in draft ss. 91 (1.1) to (1.5) (which inter alia can operate to trigger a stub taxation year in a CFA where there has been a change (e.g., a decrease, as in the above example) to a relevant taxpayer’s surplus entitlement percentage (SEP) respecting that CFA):

• There is an exception to this rule in s. 91(1.1)(b)(i), where the decrease to the taxpayer's SEP in the particular CFA is matched by an increase to the SEP in the particular CFA of one or more taxpayers, each of which is a taxable Canadian corporation that does not deal at arm's length with the taxpayer immediately after the particular time. Two points:

First, the decrease and increase(s) must be in respect of the same particular CFA. Thus, if there is some sort of reorganization involving two particular CFAs and the taxpayer's SEP in one of them decreases but the taxpayer's (or a non-arm's length taxable Canadian corporation's) SEP in the other one increases, that does not fit within this exception even if the total amount of attributable FAPI remains unchanged. Moreover, this exception would apply only where the increased SEP lands in a non-arm's length taxable Canadian corporation - and thus would not apply where the other non-arm's length taxpayer is an individual or a trust or even a partnership, notwithstanding that the SEP decrease is to be "determined as if the taxpayer were a corporation resident in Canada."

• The deemed (s. 91(1.2)) year end respecting, e.g., a particular CFA of the Canadian taxpayer, applies also respecting each resident corporation not dealing at arm's length with the taxpayer (and each partnership where the particular taxpayer or a non-arm's length corporation resident in Canada is, directly or indirectly, through one or more partnerships, a member thereof.)
• Ss. 91(1.4) and (1.5) provide in specified circumstances for an election to be made for there to be a deemed CFA stub year under s. 91(1.2). Two examples in the Explanatory Notes illustrate where this is desirable. However, it is unclear why these measures are elective, since it is difficult to see any circumstance where this result would not be desirable from the perspective of the particular taxpayer in the situations where the elections are available.

Neal Armstrong. Summaries of Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI," International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8 under s. 91(1.1), s. 91(1.2). s. 91(1.4) and s. 91(1.5).