A U.S. resident corporation ("Trans World U.S.") that incurred business losses while it was owned by a Canadian-resident individual and then was subsequently transferred by the individual to the taxpayer, which also was controlled by the individual. Subsequently, Trans World U.S. earned fapi.
Bowman TCJ. found that under Regulation 5903(1)(b)(i), the foreign affiliate that sustains the active business losses in the prior years (Trans World U.S.) must have been a foreign affiliate of the taxpayer corporation in the years when it sustained those losses, and that it must be a foreign affiliate of the same corporation in respect of which the fapi is to be determined in a subsequent year. Accordingly, the business loss in question was non-deductible.
Bowman TCJ. stated (at p. 267):
"The object behind the FAPI rules was to discourage Canadians from parking investments in off-shore companies (usually tax havens), or, if they did, at least to require them to pay taxes currently on the income so generated. That object would be defeated if a Canadian resident were permitted to acquire from a third party a company, resident in a listed country, with accumulated active business losses and use those losses to offset both the income taxable in that country ... and the passive income taxed under subsection 91(1)."