Many foreign jurisdictions, such as Germany, Sweden and Finland, have profit transfer agreement (“PTA”) mechanisms that allow for full or partial combination of the tax results of entities under common control. CRA has considered (e.g., in 2001-0093903) that a payment under such a PTA could, in certain circumstances, be “income from property” to the foreign affiliate recipient that is recharacterized as “income from an active business” under s. 95(2)(a)(ii) (the “General Approach”) Following 26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6, does CRA no longer follow the General Approach, for example, where a profitable operating subsidiary in Finland or Sweden (“FA-Sub”) makes PTA payments to a grand-parent (“FA-GP”)? After noting that this IFA position found that a PTA payment made by a German-resident subsidiary to its wholly-owning German-resident parent would be considered to be a pro rata distribution respecting all of its shares and, as such, would be deemed to be a dividend under s. 90(2), CRA stated:
We… are hereby confirming that the proposal to limit the application of the General Approach to PTA payments made before 2017 was only meant to apply to situations where the PTA payment is deemed under subsection 90(2) to be a dividend. For any other PTA situations, such as the one you illustrate above concerning FA-Sub and FA-GP, the CRA will continue to apply the General Approach.