* the business activities of the foreign affiliate are "more closely connected" to the business activities carried on in Canada by the CRIC than to the business activities of any other non-resident company in the group;
* officers of the CRIC resident in and working in Canada were the principal decision makers in making the investment in the foreign affiliate and will have the ongoing decision making authority for the investment; and
* the performance evaluation and compensation of officers of the CRIC resident in and working in Canada will be based on the results of operations of the subject corporation to a greater extent than will be the performance evaluation and compensation of officers of any non-resident corporation in the group (other than the subject corporation).
Draft subsections 212.3(4) and (5) provide elective rules that permit taxpayers to reduce the PUC of shares of a CRIC where deemed dividends might otherwise arise under paragraph 212.3(2)(a).
The PUC suppression election may not be available where there are Canadian holding companies because the holding companies are persons that do not deal at arm's length with the CRIC and the shares of the CRIC are not held by the foreign purchaser directly.
The Department should except companies that are publicly traded on Canadian stock exchanges or, at a minimum, provide a rule for determining control of a CRIC (or potential CRIC) where a company's shares are publicly traded.
We believe this factor might be helpful if it simply stated that the "foreign affiliate activities are connected to the business activities of the CRIC." Thus, we recommend eliminating the "more closely" test as such.
Paragraph 212.3(5)(b) requires consideration of whether shares in an investment made by a CRIC fully participate in the profits of the investment or otherwise shares in the appreciation of the subject corporation's value.
Except where a decision is made by fiat at the parent level, it will generally be unclear when an investment is made "at the direction or request" of a non-resident corporation as opposed to being made by the CRIC. As important, because the senior management of the non-resident parent is ultimately responsible for setting the broad corporate strategy executed by subsidiary managers, it will likely always be possible to find shreds of evidence that even the most independent Canadian decision was made "at the direction or request" of a non-arm's length non-resident.
The balance of the business purpose tests in paragraphs 212.3(d)-(g) look to which entity initiates negotiations with respect to certain investment transactions, which entity exercises the principal decision-making authority, whether performance or compensation for senior Canadian officers is linked to an investment in a foreign affiliate, and whether the senior officers of the foreign affiliate are accountable to senior officers of the CRIC.
TEI questions how these tests are relevant for determining the economic benefit to the CRIC, especially where the CRIC owns common shares in a foreign affiliate, future appreciation accrues to the CRIC, and cash will eventually be repatriated to the CRIC on the shares (or the shares will be sold).
Where a Canadian subsidiary is a controlled foreign affiliate of a foreign parent, it is difficult to understand the abuse of the Canadian tax system where the CRIC's internally generated cash is invested in a downstream investment and the CRIC shares in both the growth potential of the downstream investment and in future cash repatriations.