Words and Phrases - "directly related"
30 September 2013 Internal T.I. 2012-0439661I7 - Income earmarked for future use & 95(2)(a)(i)
A CFA of Canco held funds generated from projects which were owned and operated by FA1, with the funds being "earmarked" for future investment in projects to be carried out by other CFAs of Canco. Earmarked funds for such future project investments which had been generated from existing projects also were held by FA2, which served as a principal global finance and treasury centre within the Canco group of companies, or by another CFA of a predecessor of Canco which previously had served that function.
The Directorate considered that the income on such earmarked funds was not deemed to be active business income by s. 95(2)(a)(i).
The "directly related" test in s. 95(2)(a)(i)(A) (which "can be examined through the use of a ‘but for' test") was not satisfied as:
Canco has not demonstrated that the income from property earned within FA1, FA2, or FA3 is dependent upon the occurrence of the active business activities of the related foreign affiliates. The earmarking of investment property for use in future years in the active business activities of related foreign affiliates does not support the conclusion that the income from property would not have otherwise have been generated but for the active business activities taking place.
Furthermore, the requirement in s. 95(2)(a)(i)(B) that the income on the earmarked funds would have been active business income to the other foreign affiliates, if earned by them, also was not satisfied, as:
the amounts on deposit were for the purpose of…future business expansion…and not for expenses incidental to or pertaining to the carrying on the other foreign affiliates' active business…[and] removal of the earmarked funds would [not] be decidedly destabilizing…[as] the operations of Canco and its affiliates could continue despite the removal of these investment funds, albeit at some inconvenience and potentially at lower profitability… .
Armada Equipment Corporation v. The Queen, 2007 DTC 879, 2007 TCC 260 (Informal Procedure)
In finding that fees paid to an accounting firm to file claims for investment tax credits did not qualify as "directly related" to the prosecution of scientific research and experimental development, Mogan D.J. stated (at para. 15) that:
"In order to be 'directly related'', an expenditure must be incurred in the research itself or in the development itself. The amount paid to Deacur & Co. was a consequence of research and development which would already taken place."
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| Tax Topics - Income Tax Regulations - Regulation 2902 | 90 |