In 2013-0474431E5, a Canadian parent company (Canco) seconded employees to its foreign affiliate (FA).  The seconded employees represented 5% of the FA’s workforce engaged in providing services to arm’s length customers.  The FA reimbursed Canco the cost of its seconded employees plus a 25% mark-up. The CRA confirmed that Canco would be viewed as providing a service to the FA, such that 5% of the FA’s income would be considered “foreign accrual property income” (FAPI) under s. 95(2)(b)(ii).  Such FAPI would be taxed in Canco on a current basis.  The CRA also confirmed that this result could be avoided where the FA merely reimburses Canco’s costs without any mark-up, but only

if such cost-recovery represents an arm’s length fee under Canada’s transfer pricing rule in s. 247.  In such event, the activities of the seconded employees would not be considered part of Canco’s business. However, if s. 247 applies to impute a profit element to Canco (under applicable transfer pricing principles), the FAPI result would be the same as if Canco actually charged a mark-up.  In other words, where Canco actually earns a profit or is deemed to earn a profit (under transfer pricing principles), Canco would be viewed a providing a service to the FA such that s. 95(2)(b)(ii) would apply to treat 5% of the FA’s service income as FAPI.