2014-0550511C6 Q.8 95(2)(b)(ii)

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.

Principal Issues: a) Whether FAPI arises in respect of a secondment of employees from Canada to a CFA where a markup is charged versus where no markup is charged; b) Is the fee charged to the CFA deductible in computing FAPI such that no net FAPI arises?

Position: a) FAPI if markup is charged, but no FAPI if no markup; b) Fee is generally deductible in computing FAPI, but whether there’s any net FAPI depends on facts.

Reasons: As discussed in response below.

Author: Beaulne, Dave

Section: 95(2)(b)(ii)

2014 CTF Conference – CRA Roundtable
Q.8 – 95(2)(b)(ii)

In document number 2013-0474431E5, the CRA seems to take the position that FAPI can arise, as a result of subparagraph 95(2)(b)(ii), on the secondment of employees by a Canadian parent company (Canco) to its foreign affiliate (FA) where FA reimburses Canco for the salaries of the employees plus a 25% markup. On the other hand, the CRA seems to indicate that no FAPI would arise if no such markup is charged.


a)    Did the CRA intend to indicate that no FAPI would arise under 95(2)(b)(ii) if no markup is included in the fee charged for the services of the seconded employees whereas FAPI would arise if an appropriate markup is charged?

b)    If so, does the CRA agree that the fee charged to the CFA is deductible in computing the FAPI of the CFA such that there may not be any net FAPI if the fee reflects an arm’s length charge for the services rendered by the relevant employees?

CRA Response:

a)    Yes, however, some clarification might be in order as to what we are contemplating in terms of a “markup”. The key is whether the markup includes a profit element. It would not always be the case that a markup over direct salary reimbursements would constitute a “profit” element. Such a markup could conceivably represent solely a proxy for other employment benefits. If such a proxy is reasonable in the circumstances, and no element of profit is built in, the relevant Canadian corporation would not be considered to be providing services to the foreign affiliate, and subparagraph 95(2)(b)(ii) would not apply. That is the key distinction: if the Canadian parent earns a profit, then it would be considered to provide the services of its seconded employees in the course of its own business and that, in our view, would trigger the application of subparagraph 95(2)(b)(ii). If it is simply receiving a full reimbursement for all of its costs relating to the seconded employees, the situation is no different than if the FA had hired the employees directly and, as such, the Canadian parent would not be considered to be providing services to the FA.

b)    Depends on the facts and circumstances and the application of proper transfer pricing principles. In general, the markup would be taken into account in computing FAPI, but whether or not it would result in a total offset of FAPI depends on the proper determination of the related profit to be attributed to the activities of the relevant personnel.


Dave Beaulne

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