A wholly-owned non-resident subsidiary (“CFA”) of Canco owned 50% of the common shares of a non-resident corporation (“FA”) which were assumed to constitute offshore investment fund property (“OIFP”). CFA received annual dividend distributions from the OIFP. Canco argued that a dividend paid by CFA to Canco generated a deduction pursuant to s. 94.1(1)(g) from the income inclusion to Canco pursuant to s. 94.1(1)(f). In rejecting this position, the Directorate stated:
By including in income pursuant to subsection 91(1) its share of CFA’s FAPI (which includes under element C the amount determined by subsection 94.1(1) in CFA’s FAPI computation), Canco will effectively include an imputed amount in respect of the FA Shares in its income, to the extent of its interest in the CFA. …
CFA received dividends from the FA Shares. Those dividends would not have been included in the computation of CFA’s FAPI as dividends from another foreign affiliate of Canco are excluded from the computation of the FAPI of CFA pursuant to paragraph (b) of element A of the definition of FAPI in subsection 95(1). The inclusion in CFA’s FAPI resulting from the reading of paragraph 94.1(1)(g) as modified by element C in the definition of foreign accrual property income in subsection 95(1) effectively results in an inclusion in Canco’s income that is comparable to the inclusion that would have resulted from the direct holding of the FA Shares. More specifically, the denial of the reduction described in paragraph 94.1(1)(g) resulting from the modified parenthetic exclusion in that provision achieves the result described above.
The payment of a dividend by CFA to Canco is not relevant to the application of modified subsection 94.1(1). The CFA dividend is not income from OIFP because of the parenthetical exclusion in paragraph 94.1(1)(a).
The Directorate showed the wording of s. 94.1(1) as modified by the FAPI - C reading rules.