The Canada Revenue Agency reassessed multiple taxation years and challenged the allocation of income between the Canadian management company 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 and that a portion of the return reported offshore reflected profit allocation rather than arm’s length compensation.
The reassessment adopted a defined interpretation of where profit belonged within the structure.
A Canadian private equity firm operated through a centralized Canadian management company overseeing domestic and offshore fund vehicles.
The Canadian manager directed:
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 entities to the Canadian manager.
As the platform expanded cross-border, those amounts increased in absolute terms.
The dispute did not turn on contracts.
It turned on where the platform’s economic authority and risk assumptions actually resided.
| Issue | CRA's Position | Company's Position |
|---|---|---|
| Location of value creation | Profit belongs in Canada because the Canadian manager directed capital raising, investment approvals, and financing decisions. | Profit belongs across the structure because portfolio assets and capital deployment occurred through the offshore fund vehicles. |
| Role of foreign entities | Limited independent authority because strategic investment decisions were ultimately controlled by the Canadian manager. | Independent investment entities because foreign funds held the portfolio assets and executed transactions. |
| Nature of offshore income | Residual profit allocation because the Canadian manager exercised the functions that produced the economic return. | Arm’s length compensation and investment returns because income reflected contractual allocations within the platform. |
| Economic risk | Risk concentrated in Canada because the manager directed investment strategy and financing. | Risk shared across the platform because investment vehicles bore asset-level exposure. |
The reassessment created exposure across several areas:
The evidence and framing were structured around functional control and risk allocation. The Agency’s broader profit reallocation did not proceed.
The reassessment was reduced.
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From Tax Dispute Inflection Points
From Tax Dispute Caselaw & Signals
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