Subsection 5903(3)
See Also
Trans World Oil & Gas Ltd. v. The Queen, 95 DTC 260 (TCC), briefly aff'd 98 DTC 6060 (FCA)
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)."
Administrative Policy
21 October 1992 Memorandum (Tax Window, No. 27, p. 13, ¶2345; October 1993 Access Letter, p. 476)
Where the amalgamation of two unrelated taxable Canadian corporations precedes the merger of their respective wholly-owned U.S. subsidiaries under a foreign merger as defined in s. 87(8.1), Regulation 5903(3) will specifically include in the deductible loss calculation of the U.S. amalgamated corporation the deductible losses which arose during the periods throughout which the two U.S. predecessors were foreign affiliates of their respective Canadian parents.