2015-0573801C6 Foreign affiliates - sale of property to taxpayer

Principal Issues: Whether the cost to Canco of property sold to it by a foreign affiliate is “relevant in computing the income” from Canco’s business for the purposes of paragraph 95(2)(a.1) if subsections 138(2) and (9) apply to exclude the cost of the property from the computation of Canco's income for the purposes of Part I of the Act.

Position: In the circumstances described in this question, the cost of the property is not relevant in computing the income from a business carried on by Canco for the purposes of paragraph 95(2)(a.1).

Reasons: By virtue of subsections 138(2) and (9), Canco’s income is unaffected by its acquisition of the property from the foreign affiliate.

Author: Meek, John
Section: 95(2)(a.1), 138(2)

CLHIA 2015 Roundtable
Question 2 – Interaction of 95(2)(a.1) and 138(2)

Consider a case where a corporation (Canco) resident in Canada and its wholly-owned foreign affiliate (FA) each carry on a life insurance business.  Canco’s life insurance business is carried on both in Canada with Canadian clients and outside Canada through a foreign insurance branch with clients in the country in which the foreign branch portion of the business is carried on.  Meanwhile, FA’s income from its life insurance business is solely “income from an active business”, as that term is defined in subsection 95(1), and that business is carried on with clients in the country in which it is resident.

In the above case, if FA sells property to Canco, paragraph 95(2)(a.1) may apply to deem FA’s income from the sale to be income from a business other than an active business and therefore foreign accrual property income (“FAPI”) if it is reasonable to conclude that the cost to any person of the property is relevant in computing the income from a business carried on by Canco.  In these circumstances, would the CRA consider paragraph 95(2)(a.1) to apply if a particular property were sold by FA to Canco’s foreign insurance branch such that when the property is subsequently sold by Canco’s foreign branch to a person with whom Canco deals at arm’s length, subsections 138(2) and (9) apply to exclude the resultant income, gain or loss from Canco’s income for the purposes of Part I of the Act? 

CRA Response

In the above circumstances, if subsections 138(2) and (9) apply to exclude the income, gain or loss arising from the disposition of the property, previously acquired by Canco’s foreign insurance branch from FA, from Canco’s income from an insurance business for the purposes of Part I of the Act, it is our view that the cost of such property would not be “relevant in computing the income from a business carried on by” Canco for the purposes of paragraph 95(2)(a.1).  Accordingly, paragraph 95(2)(a.1) would not apply to FA’s income from the sale of the property to Canco.
In the event that a taxpayer is interested in the CRA’s views regarding the interaction of paragraph 95(2)(a.1) and subsections 138(2) and (9) in other circumstances, the taxpayer can send their query to the Income Tax Rulings Directorate.

Prepared by: John Meek
2015-057380
May 14, 2015 

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