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 instead was an FA of FP for s. 91 purposes, CRA stated:
[A]ny FAPI of NRco would be included in the income of FP by virtue of subsection 91(1) … and would be treated as FAPI of CFA1 and CFA2 vis-a-vis their partnership interest in FP and such FAPI of CFA1 and CFA2 would be included in the income of Canco by virtue of subsection 91(1) .. . Such income inclusions in these entities would respectively increase the cost base of the shares of NRco owned by FP by virtue of paragraphs 53(1)(d) and 92(1)(a) …, the cost base to CFA1 and CFA2 of their respective partnership interest in FP by virtue of paragraph 95(2)(j) … and [Reg.] 5907(12)(a)(ii) [now Reg. 5908(10)], and the cost base to Canco of the shares of CFA1 and CFA2 by virtue of paragraphs 53(1)(d) and 92(1)(a) … .