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Parent's capital and oversight excluded from arm's length test for offshore bank subsidiary.
The appellant Crown appealed a Federal Court of Appeal decision holding that the respondent's Barbadian banking subsidiary qualified for the financial institution exception to the foreign accrual property income (FAPI) regime under the Income Tax Act.
The sole issue was whether the subsidiary conducted business principally with arm's length persons.
The Supreme Court unanimously dismissed the appeal, holding that a parent corporation does not conduct business with its controlled foreign affiliate when it provides capital or exercises corporate oversight.
Excluding capital injections and corporate oversight, the subsidiary's income-earning investment activities were conducted at arm's length for at least 86 percent of its income during the years in issue.
The arm's length requirement was therefore met and the respondent was entitled to the financial institution exception.
