Corporate Finance: Management Services

Case Study

Fact Pattern

• A Co is incorporated in BC with its head office located in British Columbia.
• A Co has a number of wholly owned foreign affiliates, which carry on active business in the United States, Asia and Europe.
• A Co provides management services to its foreign affiliates that are related to the business operations of the foreign affiliates. The management services include executive support services, treasury functions, strategic operational decisions, human resource policies, human resource training and development, executive foreign assignment management and international tax planning.
• A Co and its foreign affiliates have completed a transfer pricing study to ensure the non-arm's length management fees charged to its foreign affiliates are comparable to an arm's length charge for these management services.

Illustration

Analysis

• A Co is eligible to apply for registration under the International Financial Activity Act (IFAA) since it will be carrying on an "international financial business".
• A Co will be required to become a member of the IFC BC Society in order to remain registered.
• A Co is carrying on an active business as defined in subsection 248 (1) of the Income Tax Act (Canada) and is therefore carrying on a qualifying business through a fixed place of business in British Columbia. Some of the management and control activities will be considered to be prescribed management services provided to a non-resident foreign affiliate directly related to the business operations of the foreign affiliate.
• Since A Co has its head office in British Columbia, certain of its management activities provided to non-residents can qualify. The regulations prescribing management services have created some uncertainty relating to qualifying activities, but it would appear that executive support services and strategic operational decisions should qualify as strategic management services.
• Certain human resource activities, such as training and development, should also qualify under the IFA Regulation.
• Managing executive foreign assignments may also qualify to the extent these activities include activities that could be characterized as benefits management, such as tax equalization, costs of moving and moving allowances and support. International tax planning could be a qualifying activity under paragraph 2(2)(i) as it involves "providing financial advice, other than prescribed financial advice, to non-resident persons."
• Therefore, it is possible that most of A Co's management services will qualify as international financial activities under a number of provisions of the IFAA.
• A Co is eligible to claim a refund of its provincial corporate income taxes paid in respect of its international financial activities.

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