16 May 2018 IFA Finance Roundtable, Q.8

For the foreign affiliate reorganizations referred to in ss. 88(3) and 95(2)(c), (d.1) and (e), transfers of capital property are deemed to have occurred on a tax-deferred basis unless the taxpayer elects higher proceeds through a “relevant cost base” (RCB) election. The RCB definition was amended in 2013 (generally effective August 19, 2011) to allow the election only where the FA is an eligible controlled foreign affiliate (ECFA). To be an ECFA the taxpayer’s participating percentage must be not less than 90%. Under the definition of participating percentage, the participating percentage of a taxpayer in a controlled foreign affiliate is deemed to be nil if the FAPI for the year is less than $5,000, which means that in such cases the FA appears not to qualify as an ECFA. Any comment on this?

Finance indicated that there is a drafting error in the definition of eligible controlled foreign affiliate. The current rule requires the foreign affiliate to have FAPI in excess of $5,000 in order to make the election. However, now that it has been brought to Finance’s attention, it will be considering whether or not to correct this deficiency.

Transfers under ss. 88(3) and 95(2)(c), (d.1) and (e) can be elected under para. (b) of the “relevant cost base” definition in s. 95(4) to occur at up to fair market value rather than on a tax deferred basis where the transferring foreign affiliate is an eligible controlled foreign affiliate (ECFA). To be an ECFA the taxpayer’s participating percentage must be not less than 90%. The participating percentage of a taxpayer in a controlled foreign affiliate is deemed to be nil if the FAPI for the year is less than $5,000, which means that in such cases the FA does not qualify as an ECFA.

Finance acknowledged that this anomaly arises from a drafting error, and that it is considering whether or not to correct this deficiency.