Category Archives: International Taxation

Offshore Property Income, FAPI – Sas Ansari

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Foreign Accrual Property Income of a Lending Business

CIT Group Securities (Canada) Inc v The Queen, 2016 TCC 163

At issue was whether the income earned by Controlled Foreign Affiliates (CFA) of the Taxpayer were Foreign Accrual Property Income (FAPI) or exempted from FAPI.


The facts and structure of the Taxpayer and related entities is complex and not reproduced. See the first 84 paragraphs of the decision.


The Tax Court reviewed the relevant provisions of the Income Tax Act. The ITA subjects the world-wide income of Canadian residents to tax. The FAPI regime in Subdivision i of Division B of Part I deals with income earned on passive outbound investment by Canadian residents through non-resident corporations. The purpose is to subject to Canadian tax certain foreign passive or investment income that would otherwise erode the Canadian tax base, whether or not that income is distributed to Canada or not.

The FAPI regime starts by looking at the Canadian resident taxpayer’s direct and indirect ownership interest in the foreign corporation to determine whether the corporation is a Foreign Affiliate (FA) or a Controlled Foreign Affiliate (CFA) of the Canadian resident.  the FAPI regime only applies to CFAs.  FAPI income must be included on an accrual basis, and included at the end of each taxation year of the CFA that ends in the taxpayer’s taxation year.

The types of income captured by the FAPI regime are defined in subsection 95(1), one such income being income from property which includes income from an investment business, income from an adventure or concern in the nature of trade, but not income included in income from an active business by operation of subsection 95(2).

Paragraph 95(2)(l) includes certain amounts when calculating “income from property” for purposes of FAPI – including income from trading or dealing in indebtedness UNLESS the business is carried on by an affiliate of a foreign bank, a trust company, a credit union, an insurance corporation, or a trader or dealer in securities whose activities are regulated by the law.  An “investment business” is defined in 95(1) to be a business the “principal purpose of which is to derive income from property (including interest, dividends, rents, royalties or any similar returns or substitutes therefor), income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the disposition of investment property, unless” it carries on such business as a foreign bank, trust company, credit union, insurance corporation, or trader or dealer in securities whose activities are regulated by law.  Subsection 95(1) also expands the definition of “lending of money” to include the acquisition of accounts receivable from arm’s length persons or the acquisition or sale of “lending assets’ (defined in 248(1)).

Clause 95(2)(a)(ii)(B) includes in Income from an Active Business interest paid or payable between related foreign corporations that wold be deductible in calculating their income from an active business (not carried out in Canada).

In interpreting these complex provisions, the court referred to the SCC decision in Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 – the text, context, and purpose method of interpreting legislation:

The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play[s] a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole

With respect to the ITA, the FCA in Lehigh Cement Limited v. The Queen, 2011 FCA 120, stated that the Act is interpreted mostly textually:

“[w]here Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe”: Canada Trustcosupra at paragraph 11. Where the provision at issue is “clear and unambiguous,” its words “must simply be applied”: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 at paragraph 40. In such circumstances, a supposed purpose “cannot be used to create an unexpressed exception to clear language” or “supplant” clear language: Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715 at paragraph 23, citing P. W. Hogg, J. E. Magee and J. Li, Principles of Canadian Income Tax Law (5th ed. 2005), at page 569.

The Court proceeded to interpret paragraph 95(2)(l).  The Court preferred the Respondent’s interpretation of the preamble such that the phrasing expanded the meaning of “trading or dealing in indebtedness” to include the earning of interest on indebtedness (para 108).  The preamble, therefore, requires the court to first determine whether the principal purpose of the business is to derive income from “trading or dealing in indebtedness”.

The difference in position between the parties was whether the parenthetical phrase at the end of the preamble is part of the description of the business caught by the preamble or part of the description of the income from the business that is included in computing income from property.  After breaking down the preamble into its constituent parts (as recommended by the Author HERE), the court held that the words describe the type of business by reference to its principal purpose, and the words in the parentheses of concern qualify the last word before it.

NOTE: The courts approach to interpreting this provision is superb and deserves a careful reading (paras 106 – 126).

The Court held that the principal purpose of the FA’s business was to  earn income from interest which is part of the business of earning income from trading or dealing in indebtedness. The next issue was whether the exception  in subparagraph 95(2)(l)(iii) applied.

The relevant exemption would apply if the FA carried on business AS a foreign bank or a trust company.  The word “as” in this context is used as a preposition to express a relationship between the noun phrase and the preceding words – thus means “In the capacity of” (para 139).  To benefit from the exemption, therefore, two requirements must be met:

  1. the business must be carried on in one of the listed capacities or forms; and
  2. the business activities in that capacity must be regulated in the relevant foreign jurisdiction.

The phrase “foreign bank” is exhaustively defined (“means”) in subsection 95(1) with reference to the Bank Act.  Specifically, the definition of “foreign bank” is such that it “identifies not only entities that are banks in the traditional sense but also other entities that may not be banks as such under either Canadian law or the law of the relevant foreign jurisdiction” (para 157).

 In this case, the FA met the definition of a foreign bank and, since it was regulated by the foreign government, it met the two requirements for the exemption.

NOTE: GAAR was not argued in this case.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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General Anti Avoidance Rule GAAR – Sas Ansari

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General Anti-Avoidance Rule – GAAR

Univar Holdco Canada ULC v The Queen, 2016 TCC 159

At issue was whether the transactions used to strip almost $1B in surplus from a Canadian subsidiary by a UK private equity firm was caught by GAAR – specifically whether the transaction was a misuse or abuse of the relieving exemption in 212.1.(4) of the ITA.

The Court held that the transactions “circumvented the application of the anti-avoidance rule in section 212.1 in a manner that “frustrated or defeated the object, spirit or purpose” of section 212.1 in general and subsection 212.1(4) in particular: Canada Trustco Mortgage Company v Canada, 2005 SCC 54 at paragraph 45.”


A UK private equity firm acquired a Netherlands public corporation with a Canadian operating sub that had $899M in surplus.  A series of transactions were entered into to avoid the anti-avoidance rule in 212.1 by taking advantage of the relieving provision in 212.1(4).  The transactions involved are not reviewed here.

The CRA applied GAAR and the taxpayer admitted a tax benefit and an avoidance transaction. This left the issue of misuse and abuse.


 The TCC began by reviewing the legislation.  Subsection 212.1(1) deals with dispositions by non-residents of Canadian resident corporations to other Canadian resident corporations that is not at arm’s length with the non-resident, where immediately after the disposition the subject corporation is connected (s 186(4)) with the purchaser corporation.  The effect of the provision includes a deemed dividend to the extent that the FMV of non-share consideration exceeds the PUC of the shares disposed, and includes a PUC grind to prevent a step-up of PUC beyond the historic value.

Subsection 212.1(4) exempts a disposition from the application of 212.1(1) where the disposition is to a purchaser corporation that immediately before the disposition controls the non-resident seller.

The corporations were in a sandwich structure that, after a few ‘contortions’ resulted in the surplus to be stripped out of the Canadian corporation.  There were no shares of the Canadian sub sold and no money came into Canada to increase the PUC of the shares (para 41).

In order for GAAR to apply, one of the requirements is that there was “abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.” (para 45 – Canada Trustco Mortgage Company v Canada, 2005 SCC 54).  The burden is on the Crown to prove this. Abuse may be found where “the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions”.

The “abuse or misuse” requirement can be met in three ways – Lipson v Canada, 2009 SCC 1:

  • the outcome is one the provision relied on seeks to prevent
  • the outcome defeats the underlying rationale of the provisions relied on, or
  • the outcome circumvents certain provisions in a manner that frustrates the object, spirit and purpose of those provisions.

Courts engage in two steps (para 62):

  1. the need to identify the object, sporit or purpose of the provisions of the ITA relied on to obtain the tax benefit as part of the overall scheme of the ITA, relevant provisions, and with premissible extrinsic aids; and
  2. consider whether the facts of the case at bar are such that the object, spirit or purpose of the provision is defeated or frustrated.

The Appellant argued that the reorganization was part of an arm’s length purchase,  and therefore was not what section 212.1 aimed at   – accessing undistributed cash of a corporation though non-arm’s length transactions where control of the corporation being stripped is not changed.  The Appellant argued that had the purchaser used a fully capitalized Canadian acquisition corporation to make the purchase of the Canadian sub, the amount could have been paid back  as tax-free intercorporate dividends.  However, the circumstances of this case required the purchaser to use a different route to get to the same result.  The use of 212.1(4) was contemplated at the acquisition stage to avoid the application of 212.1(1).

The Respondent argued that 212.1 is an anti-avoidance provision that aims to prevent dividend stripping that is integral to the PUC scheme of the ITA – Copthorne Holdings Ltd v Canada, 2011 SCC 63.  The purpose of the provision is to prevent tax-free distributions of a corporation’s retained earnings to a non-resident corporation through transactions designed to distribute funds in excess of the initial investment (para 59).

Section 212.1, the international counter part of 84.1, is meant to prevent dividend stripping – Collins & Aikman Products Co v R, 2009 TCC 299 at paras.55 and 105, aff’d 2010 FCA 251. A dividend strip is:

any transaction by a taxpayer that involves the shares of a Canadian corporation and that, directly or indirectly, effects a distribution to the taxpayer of all or part of that corporation’s surplus at a tax cost that is less than the tax otherwise payable on a dividend of that surplus to the taxpayer

– Blake Murray, “The 1977 Amendments to the Corporate Distribution Rules”(1978) 16:1 Osgoode Hall LJ 155 at 181.

The Court noted that the ITA doesn’t contain a general policy against dividend stripping and that surplus stripping is by itself not abusive tax avoidance – Gwartz v R, 2013 TCC 86Copthorne v The Queen, 2007 TCC 481.  But here, there is a specific provisions that aims to stop dividend or surplus stripping.

PUC, or Paid Up Capital, is defined in subsection 89(1) and is computed without reference to the TIA provisions other that those meant to modify it – in short, PUC is the modified stated capital of the corporation that records the capital input of shareholders per share across the classes of shares (paras 68-69). One of the adjusting provisions is 212.1 which prevents a non-resident person from avoiding Part XIII tax on dividends through non arm’s length sale of shares in certain circumstances.

There are two parts to 212.1. The first is a deemed dividend of any non-share consideration in excess of the PUC taxable under 212(2). The second is a PUC grind to prevent the increase of PUC without additional capital infusions, again preventing capital removal in excess of historic PUC.  The exception in 212.1(4) applies where the non-resident is controlled by the purchaser immediately before the sale. This would keep the surplus in Canada as the purchaser is a Canadian resident corp.

The transaction complied with the text of the provisions.  It is a defeat or frustration of the object, spirit, and purpose that is at question.

The context of 212.1 includes the provisions that affect how the ITA treats distributions from corporations resident in Canada generally.  The ITA attempts to integrate corporate and personal income tax so that the amount of tax isn’t unduly affected by the structure used to earn the income that flows to an individual resident in Canada.  Payment to non-resident of after-tax retained earnings of a corporation are subject to withholding tax  under Part XIII.   Section 212.1 is part of the withholding tax scheme imposed by 212(2).  The PUC scheme is also part of 212.1

The PUC scheme is also part of 212.1 and is meant to limit tax-free distributions to PUC – their skin in the game in Canada – so that any distribution in excess of their investment is taxable.   The excess distribution to a non-resident is subject to withholding tax (25% reduced by tax treaties) and must be withheld and remitted by the payor corporation pursuant to subsection 215(1).

The exception in 212.1(4) is in the context of this whole scheme, and cannot be used to defeat the very application of 212.1. The Court held that (para 83):

It is my view that subsection 212.1(4) is aimed at a narrow circumstance where the purchaser corporation, which is resident in Canada, actually controls the non-resident corporation without manipulating the corporate structure to achieve that control.

By reference to the budget documents and technical notes, the Court held that the purpose of 212.1 was to prevent the conversion of what would otherwise be taxable distribution of surplus into capital gains that may not be taxable in Canada – thus to “prevent non-resident shareholders from reorganizing their Canadian resident corporations so that they can convert dividend distributions that would ordinarily be subject to non-resident withholding tax under Part XIII into tax-free capital gains” (para 92).

The court went on to outline the purpose of the exception in 212.1(4) (para 97):

That purpose is to allow for a bona fide sale of shares from a non-resident corporation to a Canadian resident corporation where it is the Canadian resident corporation that controls the non-resident corporation. The exception should not apply in the situation where a non-resident owns shares of the Canadian resident purchaser corporation. The exception does not apply where a non-resident uses non-arm’s length reorganizations of their Canadian resident corporations to convert dividend distributions that would otherwise be subject to non-resident withholding tax under Part XIII into tax-free capital gains.

In response to the argument that the taxpayer could have achieved the outcome had it fully capitalized a Canadian corp to make the purchase of the Canadian subsidiary, the Court stated that this was not done and in tax law, form matters – Friedberg v The Queen, [1992] 1 CTC 1.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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