Principal Issues: (1) Will the group compensation payments be considered deductible in computing the Foreign Target's income from active business (to the extent the income is otherwise considered income from active business)? (2) Is FA6 resident in a designated treaty country for the purposes of Part LIX of the Regulations? (3) Will the amount included in Foreign Target's taxable profits for reserves previously claimed in accordance with XXXXXXXXXX tax law be included in Foreign Target's "earnings" from an active business? (4) Will FA6 be "resident" and "subject to taxation" in XXXXXXXXXX for the purpose of clause 95(2)(a)(ii)(D)? (5) If so, and assuming the other conditions of clause 95(2)(a)(ii)(D) are met, will the interest paid or payable by FA6 to FA5 on Loan 2 be included in computing FA5's income from active business?
Position: (1) Yes, but will not be included in exempt earnings. (2) No. (3) No. (4) Yes. (5) Yes, but will not be included in exempt earnings.
Reasons: (1) Application of clause 95(2)(a)(ii)(B). (2) In order to be resident in a designated treaty country for the purposes of Part LIX of the Regulations subsection 5907(11.2) of the Regulations requires that the foreign affiliate be resident in the same country under the Income Tax Act and under the relevant treaty. (3) No, amounts are notional amounts that are unrelated to the actual income of Foreign Target for the taxation year from an active business and thus will not be taken into account when computing Foreign Target`s prescribed earnings from an active business. (4) Yes, to be resident in XXXXXXXXXX and subject to taxation clause 95(2)(a)(ii)(D) requires only common law residency (as opposed to the requirements 5907(11.2) of the Regulations). (5) Plain reading of clause 95(2)(a)(ii)(D).