2015 Ruling 2015-0573141R3 - Subparagraph 95(2)(a)(i) -- summary under Subclause (d)(ii)(A)(I)

A Canadian corporation has a U.S. business of purchasing and collecting defaulted or other higher risk debts which, for risk management and state licensing reasons, it carries on through multiple U.S. subsidiaries. However, at least in the case of the “FA5 Subsidiaries,” all the work is done by the (apparently numerous) employees of their sister, FA4. CRA ruled that s. 95(2)(a)(i) deemed the income of one of the FA5 Subsidiaries to be active business income, and an addition to its exempt surplus under Reg. 5907(1) – exempt earnings – s. (d)(ii)(A)(I). Here, FA4 also held distressed debt portfolios of its own, albeit partly through a subsidiary LP – and one of the conditions for the CRA ruling was that LP qualified as a partnership for ITA purposes. CRA also stipulated that both corporatations be U.S. residents for Treaty purposes.