In 2009-0342861I7 (released last week), the CRA said that the anti-avoidance rule in s. 94.1 should not apply to the particular foreign affiliate structure presented. Briefly, s. 94.1 contains an anti-avoidance provision that can apply where a taxpayer invests in an “offshore investment fund property” and one of the main reasons for the investment is to reduce or defer Canadian tax that otherwise would have applied to the underlying income generated if that income were earned directly by the taxpayer. The rule can also apply in computing the foreign accrual property income (FAPI) of a controlled foreign affiliate (CFA) of a Canadian company (Canco), if the CFA acquires the particular offshore investment fund property. In 2009-0342861I7, the CRA was presented with a fairly complex foreign affiliate structure in which Canco’s top-tier CFA (B Co) indirectly owned various non-controlling interests in a bottom-tier foreign affiliate (Foreign Opco). Foreign Opco carried on an active business in a treaty country. In this context, the CRA helpfully commented that when the rule was introduced in 1984 the government said it would not apply to investments in non-resident entities whose principal business is a bona fide active business. The CRA further commented that technically s. 94.1 would only apply to B Co “if taxes…are significantly less than they would be if income, profit or gains from the assets had been earned directly by Canco”. On this latter point, the condition would not be met because if Canco held the Foreign Opco shares directly the earnings of Foreign Opco could be paid to Canco without any Canadian tax (i.e., as exempt surplus dividends under s. 113(1)(a)).