Canco entered into an exclusive supply agreement with an arm’s length US customer which required it to establish a plant in the U.S. close to the customer. Accordingly, USco, wholly-owned by Canco, was used to acquire this plant and operated it with USco staff, but decision-making authority was retained by Canco. Volumes were less than anticipated, resulting in significant USco losses.
The OECD guidelines, para. 9.20 state that there are two relevant factors to consider in determining which of the two corporations bears a particular risk: (1) which corporation exercises the most control over the risk; and 2) which corporation has the financial capacity to assume it. Given that Canco controls USco's strategic direction (for example, identifying new customers for USco or reducing the capacity of the plant), and that USco does not have the financial capacity to assume the risk associated with the deal concluded with the customer, should losses from USco, caused by overcapacity, be absorbed by Canco?
CRA declined to comment as this question appeared to be an actual situation under study by the Compliance Programs Branch.