A controlled foreign affiliate (CFA) is a foreign affiliate of a Canadian taxpayer that is controlled, in fact or by ownership, by Canadian residents alone or together with related parties. The Canadian rules direct particular attention to CFAs because they can earn passive income offshore that the rules attribute back to the Canadian shareholder.
Where a CFA earns foreign accrual property income — broadly, passive income such as interest, rents, royalties, and certain gains — that income is included in the Canadian shareholder's income annually, even if it is not distributed. This is the Canadian outbound counterpart to the United States rules that tax shareholders on certain income of controlled foreign corporations. CFA status also drives information-reporting obligations on the foreign-affiliate return.