Interposition of a partnership between a small stakeholder and a non-resident corp may generate FAPI (p. 10)
FAPI of a non-resident corporation may be included, in the income of a Canadian-resident person notwithstanding that the non-resident corporation may not, in fact, be a foreign affiliate or CFA of such person.
… [C]onsider a corporation resident in Canada (Canco) that has a 5 percent interest in a general partnership. The remaining partnership interest is held by an arm’s length non-resident corporation. The partnership holds all of the issued and outstanding shares of Forco, a non-resident corporation, and Forco’s income includes FAPI. For the purposes of computing its income under subsection 96(1), which includes the application of subsection 91(1), Forco is a CFA of the partnership. As a result, the FAPI of Forco must be included in the income of the partnership, and 5 percent of such FAPI must be allocated to Canco. …
Interposition of partnership may engage s. 95(2)(a)(ii)(B) (p. 10)
[F]our arm’s-length Canadian corporations (Cancos) each own 25 percent of the shares of a non-resident corporation (Forco 1). In turn, Forco 1 owns 30 percent of the shares of another non-resident corporation (Forco 2), and Forco 1 makes an interest-bearing loan to Forco 2 to fund Forco 2’s active business. … [B]ecause none of the Cancos have a qualifying interest in Forco 2, the recharacterization rule in clause 95(2)(a)(ii)(B), for example, would not be available since each Canco would hold less than 10 percent of Forco 2 on a lookthrough basis.
Alternatively, if the Cancos formed a partnership and the partnership held the shares of Forco 1, FAPI would be determined at the level of the partnership. In this case, the partnership would have a 25 percent indirect interest in Forco 2 and would therefore have a qualifying interest in Forco 2. In that case, the recharacterization rule in clause 95(2)(a)(ii)(B) may apply … .
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