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The balance sheet method

Last updated 26 May 2005

The balance sheet method tests whether a foreign company was principally engaged in eligible activities by reference to its balance sheet and, if appropriate, the balance sheets of its subsidiaries. [subsection 500(1)]

A company is principally engaged in eligible activities if 50% or more of the gross value of the company's assets were for use in eligible activities - the '50% assets test'. [subsection 500(2)]

This percentage is worked out as follows:

(A ÷ B) × (100 ÷ 1)


A is gross value of the company's assets used in eligible activites

B is gross value of all of the company's assets

The gross value of an asset is its value shown in the company's balance sheet prepared for reporting to the shareholders on an annual basis.

The balance sheet test cannot be used if the balance sheet for the company was not prepared in accordance with commercially accepted accounting principles or if it does not give a true and fair view of the financial position of the company. [subsection 500(9)]

Balance sheet method and lower tier companies

An offshore holding company may not satisfy the active business exemption in its own right under the balance sheet test if the company does not have any active business of its own. To prevent this, the active business exemption allows the first tier foreign holding company to look through to the underlying assets of certain subsidiaries.

This look-through rule is available if a holding company owns 50% or more of the paid up share capital of another company, either directly, indirectly or a combination of these.

Companies that satisfy this requirement are referred to as subsidiaries of the holding company. [subsection 500(3)]

The holding company treats its share of the underlying assets of its subsidiaries as its own in using the balance sheet method to claim the active business exemption. [subsection 500(3)]

There is no limit to the number of tiers of companies a holding company may look through, provided the holding company has an interest of 50% or more in each lower tier company. [section 501]

Whenever the look-through rule applies, any intercompany indebtedness in relation to the holding company and its subsidiaries is not taken into account when working out the percentage of the holding company's assets used in eligible activities. Shares held by the holding company or its subsidiaries in subsidiaries of the holding company are also not taken into account. [subsection 500(5)]