Parent (a Canadian-resident parent of a multinational group) and CFA (resident in a designated treaty country, Country A, and earning active business income) entered into the “CFA Service Agreement” for the provision by CFA of services to group companies and Parent also entered into the “Canco Service Agreement”) with Canco for Canco’s provision of services to group companies. CRA subsequently reassessed Canco for certain taxation years to include in its income under the Canco Service Agreement a portion of the fees received by CFA under the CFA Service Agreement.
Adjustments under the MAP Settlement between the two competent authorities result in Country A’s tax authority reassessing CFA in each relevant taxation year and in a repayment to CFA of the amount of Country A income taxes that were paid but were not due. The MAP Settlement provided that no secondary adjustment would be made to the income of Canco or CFA, and none will in fact be made.
Under Country A law, transfer pricing adjustments and corresponding reassessments by the Country A tax authority do not alter the legal right of CFA to the income it earned, nor do they result in any restatement of CFA’s income in its original financial statements.
Would there be a resulting:
i. a re-computation of earnings and net earnings of CFA under Reg. 5907(1); and
ii. an addition to the earnings of CFA under Reg. 5907(2)(f) for the amount of the income retained but excluded from its income for Country A income tax purposes?
CRA responded:
i. The “earnings” of CFA, under subparagraph 5907(1)(a)(i), will be reduced by the income adjustment under the MAP Settlement and Country A reassessment pertaining to each taxation year reassessed, to reflect its income or profit from an active business as computed in accordance with the income tax law of Country A for each of its reassessed taxation years.
Upon receipt of the Country A reassessment reducing income to reflect the adjustment under the MAP Settlement, the “net earnings” of CFA, under subsection 5907(1), will be increased by an amount equal to the amount of income taxes that were paid for each such taxation year to the government of Country A but not payable in light of the MAP Settlement and Country A reassessment pertaining to that taxation year.
ii. The amount of the adjustment under the MAP Settlement and Country A reassessment that is excluded from the computation of income or profit from an active business pursuant to the income tax law of Country A for each of the reassessed taxation years will be added to the earnings of CFA for each such taxation year pursuant to paragraph 5907(2)(f) of the Regulations given that the amount of the adjustment under the MAP Settlement and Country A reassessment constitutes the “revenue, income or profit” of CFA for purposes of paragraph 5907(2)(f).