Section 93.4

Needed expansion of scope of FABI (pp. 10-11)

• As noted by commentators, the definition of foreign accrual business income (FABI) should be amended to include all income which would not be aggregate investment income had it been earned directly by the CCPC or substantive CCPC.

Reason for FABI rule (p. 2)

• The “relevant tax factor” (RTF) proposals released on August 9, 2022 would have subjected all foreign accrual property income (FAPI) and “taxable surplus” of foreign affiliates (FAs) of CCPCs to an RTF of 1.9 (instead of 4), so as to tax all FAPI and taxable surplus of such FAs at 52.63% rather than 25%.
• However, to address the issue that some FAPI and taxable surplus amounts would not be aggregate investment income (AII) if earned in Canada by a CCPC, the revised RTF proposals of August 12, 2024 introduced the concepts of “foreign accrual business income” (FABI) and “FABI surplus,” which effectively are types of FAPI and taxable surplus which continue to be subject to an RTF of 4, provided that timely elections are made.

Narrowness of FABI definition (p. 3)

• However, FABI under the s. 93.4(1) definition only includes:
  • services income under s. 95(2)(b)(i), when specified conditions are met; and
  • income from a business of developing real estate for sale, or leasing of real estate or other immovable property, that is an “investment business” but would not be an “investment business” if it were possible to meet the “five full-time employees (or equivalent)” test by counting services performed in Canada by other members of the corporate group.

FABI surplus (p. 3)

• FABI surplus is defined to include, in addition to FABI and certain other amounts, an FA’s net earnings or net loss from an active business carried on by the FA in a country. This definition would, for example, address the situation where an FA is carrying on an active business in a foreign treaty country but is earning taxable surplus because its central management and control is in Canada.

Missing items from FABI definition (p. 3)

• The definition of FABI does not capture income from the following, which also would not be AII where earned in Canada by a CCPC:
  • an adventure in the nature of trade;
  • the active trading of securities, currencies, or commodities;
  • the business of insuring or reinsuring risks;
  • services deemed to be FAPI under s. 95(2)(b)(ii);
  • the business of disposing of Canadian or foreign resource properties;
  • the business of developing real estate for sale with insufficient employees;
  • the business of leasing property other than real property with insufficient employees; and
  • a non-qualifying business.
• The narrowness of the FABI definition is particularly problematic to CCPCs which, for many years, have been earning FAPI through an FA which would not be AII if earned in Canada, and would face a tax bill of roughly twice the regular rate of corporate tax if that income was repatriated to Canada for reinvestment in their domestic operations.