Canco receives a dividend from a wholly-owned foreign affiliate (“FA”) that has been carrying on an active business in a Treaty country in which it is resident for such Treaty purposes because of its incorporation there. Should Canco maintain any information, in addition to surplus calculations, to support a s. 113(1)(a) deduction for the dividend?
After indicating that in order for FA’s net earnings from an active business to be included under para. (d) of exempt earnings, FA must be resident in a “designated treaty country” (an undefined term), CRA stated its position that for an FA to be so resident, its central management and control must be exercised there and, in addition, FA must satisfy one of the conditions stipulated under Regs. 5907(11.2)(a) to (d).
CRA further indicated that, in addition to surplus calculations, Canco is required to keep records supporting that FA is resident in the Treaty country under the central management and control test. Thus, such information in the records should:
include information relating to the whole “course of business and trading” of the FA and, thus, not be limited to the location of board meetings or where members of the board are resident.