Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
RE: Paragraph 95(1)(a)of the Income Tax Act Definition of Controlled Foreign Affiliate
We have an opinion from Legal Services and from Corporate Rulings that a Bermudian company is not a controlled foreign affiliate, as defined in paragraph 95(1)(a) of the Income Tax Act, of a Canadian company in the following situation:
1. A United Kingdom company (UKCO) owns 100% of the voting shares of a Canadian company (Canco) and 100% of the voting shares of a Bermudian company (Bermco),
2. Canco owns 100% of all the non-voting preferred shares of Bermco giving it an equity percentage as defined in paragraph 95(4)(b) of the Act of virtually 100%, and
3. Canco does not own any voting share of either Bermco or UKCO.
It is not a controlled foreign affiliate even though the Canadian company is a part of a related group as defined in paragraph 251(4)(a) of the Act that controls the Bermudian company and the Canadian company owns 100% of all the non-voting preferred shares of the Bermudian company giving it an equity percentage as defined in paragraph 95(4)(b) of the Act of virtually 100% in the Bermudiun company.
We understand that where a Canadian company is a part of a related group as defined in the Act that controls a non-resident company in which the Canadian company has a 10% or greater equity percentage that it is intended that this non-resident company will be a controlled foreign affiliate pursuant to subparagraph 95(1)(a)(iii) of the Act of the Canadian company.
To accomplish this in the above type of situation we suggest that the following amendment be made to the Income Tax Act.
"Subparagraph 95(1)(a)(iii) of the Income Tax Act is repealed and the following substituted therefore:
(iii) related group of which the taxpayer was a member or one or more members of that related group."
For your information we are enclosing photocopies of the memorandum to and from Legal Services, Corporate Rulings Division, Toronto District Office and Coopers & Lybrand.
If you have any enquiries in respect to comments in this memorandum please contact David Burton at 996-9977.
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© Her Majesty the Queen in Right of Canada, 1981
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© Sa Majesté la Reine du Chef du Canada, 1981
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