Four U.S.-resident controlled foreign affiliates of a Canadian public corporation (“Canco”), namely, CFA1 (wholly-owned by Canco), and CFA2, CFA3 and CFA4 (wholly-owned by CFA1) performed, as their only activity, research and development services (“R&D Services”) for the benefit of Canco, and with the fees paid therefor by Canco being their only revenue and being deducted by Canco in computing its income from a business carried on in Canada.
In finding that s. 95(2)(b) applied to the R&D Services provided to Canco, notwithstanding that these services were rendered under terms and conditions aligned with the arm’s length principle applicable for the purpose of s. 247(2), the Directorate stated:
Paragraph 95(2)(b), as well as the other FAPI base erosion rules under paragraphs 95(2)(a.1) to (a.4), were enacted before the current transfer pricing rules, which were introduced in 1998. As such, we see no inconsistency and no operational conflict in the combined application of these two sets of rules to the situation submitted.