Two wholly-owned U.S.-resident subsidiaries of Canco (CFA1 and CFA2) carry on a U.S. active business through a U.S. general partnership (FP) which, in turn, holds NRCo (U.S.-resident and owning investment property) and Holdco (a taxable Canadian corporation). Periodically, NRco and Holdco pay cash dividends to FP ("Foreign Dividends" and “Canadian Dividends”), which are then distributed by FP to CFA1 and CFA2. All entities have calendar year ends.
After noting that NRCo was a foreign affiliate of Canco for s. 113 purposes, but of FP for s. 91 purposes, and that s. 91 applied to include FAPI in the income of FP and also in the income of Canco in respect of such FAPI when allocated by FP to CFA1 and 2, CRA went on to state:
[S]ince NRco is not a FA of Canco for the purpose of computing the FAPI of CFA1 and CFA2 vis-à-vis Canco, the Foreign Dividends received by CFA1 and CFA2 from NRco through FP would not be excluded from the computation of the FAPI of CFA1 and CFA2 by virtue of item A(b) of the definition of FAPI.
However, after taking into account [Reg.] 5900(3) …, since in computing the income of CFA1 and CFA2 FP is treated as if it were a separate person resident in Canada, subsection 91(5) of the Act would apply to permit a deduction by FP of the Foreign Dividends received by FP with the result that, with respect to such Foreign Dividends, there is no net income from property that would be included in the value of "A" in the definition of FAPI with respect to CFA1 and CFA2.