Canco, an “eligible entity,” manufactures and sells all the Product to Forco A, which uses the Product in its manufacturing process to make the “Finished Goods” for sale to Forco B (a related foreign corporation, like Forco A) which, in turn, sells all of the Finished Goods to arm’s length customers.
Can the s. 125.7(4)(d) election be made in this situation of a multi-tiered structure or chain of entities not dealing with each other at arm’s length? After adverting to the general rule in para. (d) of the related definition that “qualifying revenue excludes amounts derived from persons or partnerships not dealing at arm’s length with the eligible entity,” CRA went on to discuss the exception to this exclusion in s. 125.7(4)(d) for where all or substantially all of an eligible entity’s qualifying revenue is from one or more particular persons or partnerships with which it does not deal at arm’s length (“NAL entity”), and a joint election is made:
Th[is] election … may be made only by an eligible entity and those NAL entities with whom it directly earns qualifying revenues. Accordingly … were Canco and Forco A to make the election … in determining Canco’s decline in qualifying revenue based on Forco A’s decline in qualifying revenue, Forco A would not have any qualifying revenue because it earns all of its revenue from persons or partnerships not dealing at arm’s length with it (Forco B). [Thus] … the election in paragraph 125.7(4)(d) would not work. In our view, the election in paragraph 125.7(4)(d) may not be made by a multi-tiered structure or chain of entities that are not dealing with each other at arm’s length.
An election under another special rule under subsection 125.7(4) … may, however, be available … to allow an alternate method of calculating qualifying revenue for an eligible entity, such as the election for affiliated eligible entities in paragraph 125.7(4)(b).