Cross-border profit allocation reassessment in a private equity platform

Platform Structure

A Canadian private equity firm operated through a centralized Canadian management company overseeing domestic and offshore fund vehicles.

The Canadian manager directed:

• Capital raising
• Investment committee approvals
• Portfolio allocation
• Financing negotiations and guarantees
• Disposition timing

Foreign fund entities held portfolio assets. Strategic authority and financing control resided in Canada.

Management fees, advisory income, and intercompany financing returns flowed from offshore fund vehicles to the Canadian manager.

As the platform expanded cross-border, those amounts increased in absolute terms.

Reassessment

The Canada Revenue Agency reassessed multiple taxation years concurrently and challenged the allocation of income between the Canadian manager and offshore fund entities.

The Agency did not dispute that services were performed or that capital was deployed. It asserted that:

Key value-driving functions were exercised in Canada
Foreign entities lacked sufficient independent authority
A portion of the return reported offshore reflected profit allocation rather than arm’s length compensation

The reassessment adopted a defined view of where profit belonged within the structure.

Dispute

The dispute did not turn on contracts.

It turned on:

• Who controlled investment decisions
• Who bore the financing and sponsorship risk
• Whether foreign entities exercised independent economic authority
• Whether pricing reflected arm’s length compensation or residual profit

The CRA's reassessment treated centralized authority as evidence that profit should reside in Canada.

The group treated centralized authority as consistent with arm’s length allocation across the structure.

Exposure

• Multi-year income reallocation to the Canadian manager
• Interest and penalty exposure
• Withholding implications
• Debt characterization review
• Broader scrutiny of cross-border profit allocation

The reassessment became the Agency’s formal position on the structure.

Resolution

Before filing the notice of objection, the record was organized around functional control and risk allocation rather than benchmark comparison.

The Agency’s broader profit reallocation did not proceed. The matter remained confined to defined allocation adjustments. The reassessment was reduced.