Removal of minority interest

Gordon has a 70% income interest in CFC A and a 55% income interest in CFC B.

CFC A is an investment company that buys, holds, and sells intellectual property, bonds and shares. It also has a sideline in rubber importing. CFC A does not develop any intellectual property itself. CFC A has intra-group transactions comprising $15,000 of sales of rubber to CFC B and $86,000 of interest income from a loan to CFC B.

CFC B is a shoe manufacturer.

Gordon initially wishes to consolidate the two CFCs for the purpose of the active business test using accounting measures of attributable income and total income.

The accounts of the CFCs are shown below.

$000s	CFC A			CFC B			Consolidated
	To/from CFC B	To/from 3rd parties	Total	To/from CFC A	To/from 3rd parties	Total
Income
Sales	15	13	28		20254	20254	20267
less costs of goods sold		17	17	15	14811	14826	14828
Gross profit			11			5428	5439
Other income
Interest	86	351	437			0	351
Dividend		901	901			0	901
Royalties		574	574			0	574
Operating expenses
Interest			0	86	2913	2999	2913
Loss on financial assets		33	33			0	33
Rent		5	5			0	5
Other expenses			0		5020	5020	5020
Net profit before tax			1885			-2591	-706
Attributable income (before removal of minority interests)						0	892
Total income (before removal of minority interests)						20254	21159
Ratio							4.2%
	30% minority interest removed			45% minority interest removed
$000s	CFC A			CFC B			Consolidated
	To/from CFC B	To/from 3rd parties	Total	To/from CFC A	To/from 3rd parties	Total
Income
Sales	11	9	20		11140	11140	11149
less costs of goods sold		12	12	8	8146	8154	8158
Gross profit			8			2985	2991
Other income
Interest	60	246	306			0	246
Dividend		631	631			0	631
Royalties		402	402			0	402
Operating expenses
Interest			0	47	1602	1649	1602
Loss on financial assets		23	23			0	23
Rent		4	4			0	4
Other expenses			0		2761	2761	2761
Net profit before tax			1320			-1425	-121
Attributable income (after removal of minority interests							624
Total income (after removal of minority interests)							11773
Ratio							5.3%

Attributable income comprises:

Interest
Royalties
Loss on financial asset (this is not a share)

Total income comprises:

Sales income
Interest
Royalties
Loss on a financial asset

[Note that dividends are removed under EX 21E(9)(a) and EX 21E(12)(b).]

If the two CFCs were consolidated without consideration of minority interests (as in the top half of table) there would be attributable income of $892,000 and total income of $21,159,000, giving a ratio - using the formula in subsection EX 21E(5) - of 4.2%.

However, minority interests must be removed line-by-line because, conceptually, Gordon has rights and obligations in respect of only 70% of all the income and expense items of CFC A, and 55% of all the expense income and expense items of CFC B.

So, for example, Gordon counts only $437,000 × 70% = $305,900 of interest income from CFC A and eliminates $86,000 × 70% = $60,200 (being his share of the amount received from CFC B), giving consolidated interest income of $246,700 (as in the interest income line in the bottom half of the table).

After removing minority interests in the consolidation there is attributable income of $624,400 and total income of $11,773,200, giving a ratio of 5.3%. If a test group is used, the CFCs in the test group are not non-attributing active CFCs.

Gordon opts not to use a test group. CFC B, on its own, satisfies the test for being a non-attributing active CFC, since it has no attributable income. CFC A does not.