Finance has expanded the scope of the proposed FABI rules

Although CCPCs that earn investment income indirectly through a controlled foreign affiliate (CFA) will no longer be eligible for a full deferral of Canadian corporate tax thereon through the reduction in the relevant tax factor from 4 to 1.9, the proposed foreign accrual business income (FABI) regime allows qualifying entities to elect to regain access to the tax deferral on certain types of foreign accrual property income (FAPI).

In its August 15, 2025 draft legislation, Finance has significantly broadened the definition of FABI in draft s. 93.4(1), from that contained in its August 2024 draft legislation, to include any FAPI that would not be included in a CCPC’s aggregate investment income (AII) if the subject CFA were a CCPC and the income was from a source in Canada (subject to certain anti-base erosion exclusions).

For instance, unlike the foreign affiliate rules, the specified investment business rules that are accessed under this deeming rule do not require the business to be conducted principally with arm's length persons, and the scope of income that is treated as specified investment income is narrower. For example, income from a specified investment business product does not include profits from the disposition of investment property. Furthermore, the AII rules have no analogue to the s. 95(2)(b) rules deeming services income to be FAPI in certain circumstances.

However, under the anti-base erosion provisions, FABI treatment will be denied where the payment is deductible in computing the payer's high-tax income. This includes deductions against AII, personal services business income, and FAPI other than FABI.

These FABI base erosion rules are similar to the base erosion provisions of s. 95(2)(b), but are narrower in scope. For example, where a CCPC pays its foreign affiliate (FA) for services, the payment will be deemed to be FAPI to the extent it is deductible in computing the CCPC's business income. However, as such amount would not be included in AII (if the FA instead were a CCPC), the payment could be eligible for FABI treatment, provided that it is deductible in computing the CCPC's income from an active business.

Neal Armstrong. Summary of Bryan Madorsky and Rachel Gold, “Department of Finance reintroduce anti-deferral rules for FAPI of CCPCs and substantive CCPCs,” International Tax (Wolters Kluwer), October 2025, No. 144, p. 1 under s. 93.4(1) - FABI.