Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
DRAFT
Canadian Tax Foundation
Corporate Management Tax Conference
June 14, 1996
Question 4
Consolidated Group in United States - "Excluded Property"
Assume Canco owns 80% of the shares of U.S. Holdco which in turn owns 100% of the shares of four operating subsidiaries in the U.S., called S1 to S4.
Canco also owns 100% of the shares of Cansub which owns the other 20% of U.S. Holdco. Canco and Cansub also own 80% and 20% respectively of the shares of U.S. Limited Liability Company ("LLC") which has loaned money to U.S. Holdco to acquire shares in the four operating subsidiaries.
100% of the assets of S1 to S3 are used in an active business. However, 30% of the assets of S4 are passive assets not used to produce income from an active business and the passive income from these assets represents less than 5% of the total income of the U.S. consolidated group. Under subsection 95(1), "substantially all" the property of each of S1 to S4 must be used in an active business before the shares of that company are "excluded property". The shares of each of S1 to S4 must be excluded property before clause 95(2)(a)(ii)(D) can deem the interest income of LLC not to be Fapi.
Will the passive assets in S4 cause the shares of S4 not to be excluded property and thus cause the interest income paid from U.S. Holdco to LLC to be Fapi of LLC?
Department's Position
Where at least 90% of the property of a foreign affiliate is "excluded property" the "all or substantially all" test will generally be considered to have been met. This measurement may be either a cost or fair market value measurement unless the facts clearly indicate that one method of measurement is more appropriate than the other.
In this example the shares of S4 would not be considered excluded property. Clause 95(2)(a)(ii)(D) would therefore not apply to the interest received by LLC from U.S. Holdco as subclause 95(2)(a)(ii)(D)(V) requires that the shares of each member of the group of corporations be excluded property.
Prepared by: Tim Kuss
Date: June 3, 1996
File Number: 961908