Words and Phrases - "reasonably regarded"

A US-resident public company (US Pubco) wholly owns US Holdco, which in turn wholly owned USCo, as well as Canco, which has foreign subsidiaries. In 2021, Canco acquired (at the "investment time") the shares of US Sub from US Holdco for FMV consideration. At the time of acquisition, Canco, Canco’s foreign subsidiaries, and US Sub carried on Business Segment 1; whereas , US Holdco carried on Business Segment 2.

The Chief Executive Officer (CEO1) and Chief Financial Officer (CFO1) of US Pubco, both residents of Canada who work principally in Canada, are also officers and directors of US Holdco, and of Canco along with a third Canadian resident working principally in Canada (EVP1). CEO1, CFO1 and another individual, EVP2, who is a US resident, are officers of US Holdco and US Sub.

The compensation of CEO1 and CFO1 is based on the consolidated results of the group, whereas that of EVP1, who manages the day-to-day operations of Business Segment 1, is based solely on the results of Business Segment 1, which includes US Sub’s results. Conversely, the compensation of EVP2, who manages the day-to-day operations of Business Segment 2, is based solely on the results of Business Segment 2.

CRA indicated that:

• at the investment time, the business activities of US Sub were part of Business Segment 1 and were similar to the business activities carried on in Canada by Canco in the same business segment; therefore, the business activities of US Sub appeared to be closely connected with the business activities of Canco for purposes of the "more closely connected business activities" test in s. 212.3(16)(a).
• regarding the “reasonably expected” test in the preamble to s. 212.3(16)(c) and, “to a greater extent” and “any” in s. 212.3(16)(c)(iii), CRA referred to the Explanatory Notes, which indicate that the extent would generally be determined based on a proportion of the officer’s overall performance or compensation (the "proportion test").
• although the proportion test for the compensation of CEO1 and CFO1 would result in a tie in applying the test in s. 212.3(16)(c)(iii), in a real-life situation, other information, in addition to the proportion test, would be considered in determining the "to a greater extent" test in s. 212.3(16)(b)(iii).
• the “reasonably expected” test referenced a test “by an objective observer with knowledge of all of the pertinent facts”;
• regarding whether it is sufficient that the performance evaluation and compensation of the officers of Canco be based on the results of the business segment of which US Sub was a part, rather than being tied specifically to the results of US Sub, CRA indicated that, for the purposes of s. 212.3(16)(c)(iii), “one must generally demonstrate that some proportion of the performance evaluation and compensation of the officers is based to some extent on the operating results of the subject corporation.”