Income Tax Regulations (C.R.C., c. 945)

Regulations are current to 2017-11-20 and last amended on 2017-07-01. Previous Versions

Participating Percentage

  •  (1) For the purpose of subparagraph (b)(ii) of the definition participating percentage in subsection 95(1) of the Act, the participating percentage of a particular share owned by a taxpayer of the capital stock of a corporation in respect of any foreign affiliate of the taxpayer that was, at the end of its taxation year, a controlled foreign affiliate of the taxpayer is prescribed to be the percentage that would be the taxpayer’s equity percentage in the affiliate at that time on the assumption that

    • (a) the taxpayer owned no shares other than the particular share;

    • (b) the direct equity percentage of a person in any foreign affiliate of the taxpayer, for which the total of the distribution entitlements of all the shares of all classes of the capital stock of the affiliate was greater than nil, was determined by the following rules and not by the rules contained in the definition direct equity percentage in subsection 95(4) of the Act:

      • (i) for each class of the capital stock of the affiliate, determine that amount that is the proportion of the distribution entitlement of all the shares of that class that the number of shares of that class owned by that person is of all the issued shares of that class, and

      • (ii) determine the proportion that

        • (A) the aggregate of the amounts determined under subparagraph (i) for each class of the capital stock of the affiliate

        is of

        • (B) the aggregate of the distribution entitlements of all the issued shares of all classes of the capital stock of the affiliate

      and the proportion determined under subparagraph (ii) when expressed as a percentage is that person’s direct equity percentage in the affiliate; and

    • (c) the direct equity percentage of a person in any foreign affiliate of the taxpayer, for which the total of the distribution entitlements of all the shares of all classes of the capital stock of the affiliate would not, in the absence of this paragraph, be greater than nil, was determined on the assumption that the amount determined under subparagraph (2)(b)(i) were the greater of

      • (i) the amount of the affiliate’s retained earnings, if any, determined at the end of the taxation year under accounting principles that are relevant to the affiliate for the taxation year, and

      • (ii) the amount determined by the formula

         A × B

        where

        A
        is the amount of the affiliate’s total assets determined at the end of the taxation year under accounting principles that are relevant to the affiliate for the taxation year, and
        B
        is 25%.
  • (2) For the purposês of this section, the distribution entitlement of all the shares of a class of the capital stock of a foreign affiliate of the taxpayer at the end of its taxation year is the aggregate of

    • (a) the distributions made during the year by the affiliate to holders of shares of that class; and

    • (b) the amount that the affiliate might reasonably be expected to distribute to holders of shares of that class immediately after the end of the year if at that time it had distributed to its shareholders an amount equal to the aggregate of

      • (i) the amount, if any, by which the net surplus of the affiliate in respect of the taxpayer at the end of the year, computed as though any adjustments resulting from the provisions of sections 5902 and 5905 and subsections 5907(2.1) and (2.2) and any references thereto during the year were ignored, exceeds the net surplus of the affiliate in respect of the taxpayer at the end of its immediately preceding taxation year, and

      • (ii) the amount that the affiliate would receive if at that time each controlled foreign affiliate of the taxpayer in which the affiliate had an equity percentage had distributed to its shareholders an amount equal to the aggregate of

        • (A) the amount that would be determined under subparagraph (i) for the controlled foreign affiliate if the controlled foreign affiliate were the foreign affiliate referred to in subparagraph (i), for each of the taxation years of the controlled foreign affiliate ending in the taxation year of the affiliate, and

        • (B) each such amount that the controlled foreign affiliate would receive from any other controlled foreign affiliate of the taxpayer in which it had an equity percentage.

  • (3) For the purposes of subsection (2),

    • (a) the net surplus of a foreign affiliate of a person resident in Canada is, in respect of that person, to be computed as if that person were a corporation resident in Canada;

    • (b) if a particular foreign affiliate of a corporation has an equity percentage (within the meaning assigned by subsection 95(4) of the Act) in another foreign affiliate of the corporation that has an equity percentage in the particular affiliate, the net surplus of, or the amount of a distribution received by, the particular affiliate is to be determined in a manner that is

      • (i) reasonable in the circumstances, and

      • (ii) consistent with the results that would be obtained if a series of actual distributions had been made and received by the foreign affiliates of the corporation that are relevant to the determination;

    • (c) if any controlled foreign affiliate of a taxpayer resident in Canada has issued shares of more than one class of its capital stock, the amount that would be distributed to the holders of shares of any class is such portion of the amount determined under subparagraph (2)(b)(ii) as, in the circumstances, it might reasonably be expected to distribute to the holders of those shares; and

    • (d) in determining the distribution entitlement

      • (i) of a class of shares of the capital stock of a foreign affiliate that is entitled to cumulative dividends, the amount of any distribution referred to in paragraph (2)(a) shall be deemed not to include any distribution in respect of such class that is, or would, if it were made, be referable to profits of a preceding taxation year, and

      • (ii) of any other class of shares of the capital stock of the affiliate, the net surplus of the affiliate at the end of the year referred to in subparagraph (2)(b)(i) shall be deemed not to have been reduced by any distribution described in subparagraph (i) with respect to a class of shares that is entitled to cumulative dividends to the extent that the distribution was referable to profits of a preceding taxation year.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts and regulations. SOR/78-913, s. 1;
  • SOR/80-141, s. 3;
  • SOR/94-686, s. 79(F);
  • SOR/97-505, s. 6;
  • 2013, c. 34, ss. 43, 83.

Special Rules

  •  (1) If, at any time, there is an acquisition or a disposition of shares of the capital stock of a particular foreign affiliate of a corporation resident in Canada and the surplus entitlement percentage of the corporation in respect of the particular foreign affiliate or any other foreign affiliate (the particular affiliate and those other affiliates each being referred to in this subsection as a “relevant affiliate”) of the corporation in which the particular affiliate has an equity percentage (within the meaning assigned by subsection 95(4) of the Act) changes, for the purposes of the definitions exempt surplus, hybrid surplus, hybrid underlying tax, taxable surplus, and underlying foreign tax in subsection 5907(1), each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, as the case may be, of the relevant affiliate in respect of the corporation is, except where the acquisition or disposition occurs in a transaction to which paragraph (3)(a) or subsection (5) or (5.1) applies, the amount determined at that time by the formula

    A × B/C

    where

    A
    is the amount of that surplus, deficit or tax, as the case may be, as otherwise determined at that time;
    B
    is the corporation’s surplus entitlement percentage immediately before that time in respect of the relevant affiliate; and
    C
    is the corporation’s surplus entitlement percentage immediately after that time in respect of the relevant affiliate.
  • (2) [Repealed, 2013, c. 34, s. 44]

  • (3) If at any time (referred to in this subsection as the “merger time”) a foreign affiliate (referred to in this subsection as the “merged affiliate”) of a corporation resident in Canada has been formed as a result of a foreign merger (within the meaning assigned by subsection 87(8.1) of the Act) of two or more corporations (referred to individually in this subsection as a “predecessor corporation”), the following rules apply:

    • (a) for the purposes of the definitions exempt surplus, hybrid surplus, hybrid underlying tax, taxable surplus and underlying foreign tax in subsection 5907(1), as they apply in respect of the merged affiliate,

      • (i) the merged affiliate’s opening exempt surplus, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the exempt surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the exempt deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (ii) the merged affiliate’s opening exempt deficit, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the exempt deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the exempt surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (ii.1) the merged affiliate’s opening hybrid surplus, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the hybrid surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the hybrid deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (ii.2) the merged affiliate’s opening hybrid deficit, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the hybrid deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the hybrid surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (ii.3) the merged affiliate’s opening hybrid underlying tax in respect of the corporation shall be the total of all amounts each of which is the hybrid underlying tax of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (iii) the merged affiliate’s opening taxable surplus, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the taxable surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the taxable deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time,

      • (iv) the merged affiliate’s opening taxable deficit, in respect of the corporation, shall be the amount, if any, by which the total of all amounts each of which is the taxable deficit of a predecessor corporation, in respect of the corporation, immediately before the merger time exceeds the total of all amounts each of which is the taxable surplus of a predecessor corporation, in respect of the corporation, immediately before the merger time, and

      • (v) the merged affiliate’s opening underlying foreign tax in respect of the corporation shall be the total of all amounts each of which is the underlying foreign tax of a predecessor corporation, in respect of the corporation, immediately before the merger time;

    • (b) for the purposes of paragraph (a),

      • (i) each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit and underlying foreign tax, in respect of the corporation, of each predecessor corporation immediately before the merger time is deemed to be the amount determined by the formula

        A × B/C

        where

        A
        is the amount of that surplus, deficit or tax, as the case may be, as otherwise determined,
        B
        is the surplus entitlement percentage of the corporation immediately before the merger time in respect of the predecessor corporation, and
        C
        is the percentage that would be the surplus entitlement percentage of the corporation immediately after the merger time in respect of the merged affiliate if the merged affiliate’s net surplus were the total of all amounts each of which is the net surplus of a predecessor corporation immediately before the merger time, but
      • (ii) the values for A, B and C in the formula in subparagraph (i) shall take into account the application of paragraph 5902(1)(b) and subsection 5907(8) in respect of the merger; and

    • (c) in respect of any foreign affiliate (other than a predecessor corporation) of the corporation in which a predecessor corporation had an equity percentage (within the meaning assigned by subsection 95(4) of the Act) immediately before the merger time, for the purposes of subsection (1), there is deemed to be an acquisition or a disposition of shares of the capital stock of that affiliate at the merger time.

  • (4) [Repealed, 2013, c. 34, s. 44]

  • (5) If there is, at any time, a disposition by a corporation (referred to in this subsection as the “disposing corporation”) resident in Canada of any of the shares (referred to in this subsection as the “disposed shares”) of the capital stock of a particular foreign affiliate of the disposing corporation to a taxable Canadian corporation (referred to in this subsection as the “acquiring corporation”) with which the disposing corporation is not dealing at arm’s length,

    • (a) each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, in respect of the acquiring corporation, of the particular affiliate and of each foreign affiliate of the disposing corporation in which the particular affiliate has, immediately before that time, an equity percentage (within the meaning assigned by subsection 95(4) of the Act) is deemed to be the amount, if any,

      • (i) in the case of its opening exempt surplus, by which the total of its exempt surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its exempt deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (ii) in the case of its opening exempt deficit, by which the total of its exempt deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its exempt surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (ii.1) in the case of its opening hybrid surplus, by which the total of its hybrid surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its hybrid deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (ii.2) in the case of its opening hybrid deficit, by which the total of its hybrid deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its hybrid surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (ii.3) in the case of its opening hybrid underlying tax, that is the total of its hybrid underlying tax in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (iii) in the case of its opening taxable surplus, by which the total of its taxable surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its taxable deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time,

      • (iv) in the case of its opening taxable deficit, by which the total of its taxable deficit in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, exceeds the total of its taxable surplus in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time, and

      • (v) in the case of its opening underlying foreign tax, that is the total of its underlying foreign tax in respect of each of the disposing corporation and the acquiring corporation, determined immediately before that time;

    • (b) for the purposes of paragraph (a), each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of the disposing corporation and the acquiring corporation, determined immediately before that time, is deemed to be the amount determined by the formula

      A × B/C

      where

      A
      is the amount of that surplus, deficit or tax, as the case may be, as determined without reference to this subsection but taking into account the application of subparagraph (c)(i), if applicable,
      B
      is the surplus entitlement percentage immediately before that time of the disposing corporation or the acquiring corporation, as the case may be, in respect of the affiliate, determined as if the disposed shares were the only shares owned by the disposing corporation immediately before that time, and
      C
      is the surplus entitlement percentage immediately after that time of the acquiring corporation in respect of the affiliate;
    • (c) if the disposing corporation makes an election under subsection 93(1) of the Act in respect of the disposed shares,

      • (i) for the purposes of paragraph (b), the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of the disposing corporation, as determined without reference to this subsection, immediately before that time, shall be adjusted in accordance with paragraph 5902(1)(b) as if the disposing corporation’s surplus entitlement percentage that is referred to in the description of B in paragraph 5902(2)(b) were determined as if the disposed shares were the only shares owned by the disposing corporation immediately before that time, and

      • (ii) no adjustment shall be made to the amount of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, or underlying foreign tax of an affiliate in respect of the disposing corporation under paragraph 5902(1)(b) other than for the purpose of paragraph (b); and

    • (d) for greater certainty, no adjustment shall be made under subsection (1) to the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, or underlying foreign tax of an affiliate in respect of the disposing corporation.

  • (5.1) If there is, at any time, an amalgamation within the meaning of subsection 87(1) of the Act and, as a result of the amalgamation, shares of the capital stock of a particular foreign affiliate of a predecessor corporation become property of the new corporation,

    • (a) each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, in respect of the new corporation, of the particular affiliate and of each foreign affiliate of the predecessor corporation in which the particular affiliate has, immediately before that time, an equity percentage (within the meaning assigned by subsection 95(4) of the Act) is deemed to be the amount, if any,

      • (i) in the case of its opening exempt surplus, by which the total of its exempt surplus in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its exempt deficit in respect of each predecessor corporation, determined immediately before that time,

      • (ii) in the case of its opening exempt deficit, by which the total of its exempt deficit in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its exempt surplus in respect of each predecessor corporation, determined immediately before that time,

      • (ii.1) in the case of its opening hybrid surplus, by which the total of its hybrid surplus in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its hybrid deficit in respect of each predecessor corporation, determined immediately before that time,

      • (ii.2) in the case of its opening hybrid deficit, by which the total of its hybrid deficit in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its hybrid surplus in respect of each predecessor corporation, determined immediately before that time,

      • (ii.3) in the case of its opening hybrid underlying tax, that is the total of its hybrid underlying tax in respect of each predecessor corporation, determined immediately before that time,

      • (iii) in the case of its opening taxable surplus, by which the total of its taxable surplus in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its taxable deficit in respect of each predecessor corporation, determined immediately before that time,

      • (iv) in the case of its opening taxable deficit, by which the total of its taxable deficit in respect of each predecessor corporation, determined immediately before that time, exceeds the total of its taxable surplus in respect of each predecessor corporation, determined immediately before that time, and

      • (v) in the case of its opening underlying foreign tax, that is the total of its underlying foreign tax in respect of each predecessor corporation, determined immediately before that time; and

    • (b) for the purpose of paragraph (a), each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of a predecessor corporation, determined immediately before that time, is deemed to be the amount determined by the formula

      A × B/C

      where

      A
      is the amount of that surplus, deficit or tax, as the case may be, as determined without reference to this subsection,
      B
      is the predecessor corporation’s surplus entitlement percentage immediately before that time in respect of the affiliate, and
      C
      is the new corporation’s surplus entitlement percentage immediately after that time in respect of the affiliate.
  • (5.11) to (5.13) [Repealed, 2013, c. 34, s. 44]

  • (5.2) If, at a particular time, control of a corporation resident in Canada has been acquired by a person or a group of persons and, at the particular time, the corporation owns shares of the capital stock of a foreign affiliate of the corporation, there shall be included — under subparagraph (v) of the description of B in the definition exempt surplus in subsection 5907(1) in computing the affiliate’s exempt surplus or exempt deficit, as the case may be, in respect of the corporation at the time that is immediately before the particular time — the amount, if any, determined by the formula

    (A + B – C)/D

    where

    A
    is the amount determined by the formula

    E × F

    where

    E
    is the affiliate’s tax-free surplus balance in respect of the corporation, determined at the time (referred to in this subsection as the “relevant time”) that is immediately before the time that is immediately before the particular time, and
    F
    is the corporation’s surplus entitlement percentage in respect of the affiliate determined at the relevant time;
    B
    is the total of all amounts each of which is the corporation’s cost amount, determined at the particular time, of a share of the capital stock of the affiliate that is owned by the corporation at the particular time;
    C
    is the total of
    • (a) the fair market value, determined at the particular time, of all of the shares of the capital stock of the affiliate that are owned by the corporation at the particular time, and

    • (b) the amount, if any, determined under paragraph 5908(6)(b); and

    D
    is the corporation’s surplus entitlement percentage in respect of the affiliate determined at the relevant time.
  • (5.3) The cost amount of a share that is referred to in the description of B in subsection (5.2) shall be determined after taking into account the application of subsection 111(4) of the Act.

  • (5.4) For the purposes of clause (B) of subparagraph 88(1)(d)(ii) of the Act, the prescribed amount is

    • (a) if the property described in that subparagraph is a share of the capital stock of a foreign affiliate of the subsidiary, the amount determined by the formula

      A × B

      where

      A
      is the affiliate’s tax-free surplus balance, in respect of the subsidiary, determined at the time at which the parent last acquired control of the subsidiary, and
      B
      is the percentage that would be the subsidiary’s surplus entitlement percentage, determined at that time, in respect of the affiliate if at that time the subsidiary had owned no shares of the affiliate’s capital stock other than the share;
    • (b) if the property described in that subparagraph is an interest in a partnership, the amount determined by subsection 5908(7); and

    • (c) in any other case, nil.

  • (5.5) For the purposes of subsections (5.2), (5.4), (7.2) and (7.3), the tax-free surplus balance of a foreign affiliate of a corporation resident in Canada, in respect of the corporation, at any time, is the total of

    • (a) the amount, if any, by which the affiliate’s exempt surplus in respect of the corporation at that time exceeds the total of

      • (i) the affiliate’s hybrid deficit, if any, in respect of the corporation at that time, and

      • (ii) the affiliate’s taxable deficit, if any, in respect of the corporation at that time;

    • (a.1) the amount, if any, by which the amount of the affiliate’s hybrid surplus in respect of the corporation at that time exceeds the amount determined under subsection (5.7) in respect of the corporation at that time if, at that time, the amount of that hybrid surplus is less than or equal to the amount determined by the formula

      [A × (B – 0.5)] + (C × 0.5)

      where

      A
      is the affiliate’s hybrid underlying tax in respect of the corporation at that time,
      B
      is the corporation’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act) for the corporation’s taxation year that includes that time, and
      C
      is the affiliate’s hybrid surplus in respect of the corporation at that time; and
    • (b) the lesser of

      • (i) the amount, if any, determined by the formula

         A × B

        where

        A
        is the affiliate’s underlying foreign tax in respect of the corporation at that time, and
        B
        is the amount by which the corporation’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act), for the corporation’s taxation year that includes that time, exceeds one, and
      • (ii) the amount, if any, by which the affiliate’s taxable surplus in respect of the corporation at that time exceeds

        • (A) if the affiliate has an exempt deficit and a hybrid deficit, in respect of the corporation at that time, the total of the exempt deficit and the hybrid deficit,

        • (B) if the affiliate has an exempt deficit and no hybrid deficit, in respect of the corporation at that time, the amount, if any, by which the exempt deficit exceeds the affiliate’s hybrid surplus in respect of the corporation at that time, and

        • (C) if the affiliate has a hybrid deficit and no exempt deficit, in respect of the corporation at that time, the amount, if any, by which the hybrid deficit exceeds the affiliate’s exempt surplus in respect of the corporation at that time.

  • (5.6) For the purposes of subsection (5.5), the amounts of exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax, of a foreign affiliate of corporation resident in Canada, in respect of the corporation, at a particular time are those amounts that would be determined, at the particular time, under subparagraph 5902(1)(a)(i) if that subparagraph were applicable at the particular time and the references in that subparagraph to “the dividend time” were references to the particular time.

  • (5.7) For the purposes of paragraph (5.5)(a.1), the amount determined under this subsection in respect of the corporation at any time is

    • (a) if the affiliate has an exempt deficit and a taxable deficit, in respect of the corporation at that time, the total of the exempt deficit and the taxable deficit;

    • (b) if the affiliate has an exempt deficit and no taxable deficit, in respect of the corporation at that time, the amount of the exempt deficit; and

    • (c) if the affiliate has a taxable deficit and no exempt deficit, in respect of the corporation at that time, the amount, if any, by which the taxable deficit exceeds the affiliate’s exempt surplus in respect of the corporation at that time.

  • (6) [Repealed, 2013, c. 34, s. 44]

  • (7) If at any time there has been a liquidation and dissolution of a foreign affiliate (referred to in this subsection as the “dissolved affiliate”) of a corporation resident in Canada that is a designated liquidation and dissolution (within the meaning assigned by subsection 95(1) of the Act) of the dissolved affiliate, each other foreign affiliate of the corporation that had a direct equity percentage (within the meaning assigned by subsection 95(4) of the Act) in the dissolved affiliate immediately before that time is, for the purposes of computing its exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax, in respect of the corporation, deemed to have received dividends immediately before that time the total of which is equal to the amount it might reasonably have expected to receive if the dissolved affiliate had, immediately before that time, paid dividends on all shares of its capital stock the total of which was equal to the amount of its net surplus in respect of the corporation immediately before that time, determined on the assumption that the taxation year of the dissolved affiliate that otherwise would have included that time had ended immediately before that time.

  • (7.1) Subsection (7.2) applies if

    • (a) a foreign affiliate (referred to in this subsection and subsections (7.2) to (7.6) as the “deficit affiliate”) of a corporation resident in Canada has an exempt deficit, in respect of the corporation, at a particular time; and

    • (b) at the time (referred to in this paragraph and subsections (7.2) to (7.6) as the “acquisition time”) that is immediately after the particular time, shares of the capital stock of a foreign affiliate (referred to in this subsection and subsections (7.2) to (7.6) as an “acquired affiliate”) of the corporation in which the deficit affiliate has, at the particular time, an equity percentage (within the meaning assigned by subsection 95(4) of the Act) are acquired by, or otherwise become property of,

      • (i) the corporation, or

      • (ii) another foreign affiliate of the corporation, in the case where the percentage that would, if the deficit affiliate were resident in Canada, be the deficit affiliate’s surplus entitlement percentage in respect of the acquired affiliate immediately after the acquisition time is less than the percentage that would, if the deficit affiliate were so resident, be its surplus entitlement percentage in respect of the acquired affiliate at the particular time.

  • (7.2) If this subsection applies, there is to be included,

    • (a) at the time (referred to in this subsection and subsections (7.6) and (7.7) and 5908(11) and (12) as the “adjustment time”) that is immediately before the time that is immediately before the time that is immediately before the acquisition time, under subparagraph (v) of the description of B in the definition exempt surplus in subsection 5907(1) in computing an acquired affiliate’s exempt surplus or exempt deficit in respect of the corporation, the amount, if any, equal to the lesser of

      • (i) the amount determined by the formula

         A/B

        where

        A
        is the deficit affiliate’s exempt deficit in respect of the corporation immediately before the acquisition time, and
        B
        is the percentage that would, if the deficit affiliate were resident in Canada, be the deficit affiliate’s surplus entitlement percentage in respect of the acquired affiliate immediately before the acquisition time, and
      • (ii) the lesser of

        • (A) the acquired affiliate’s tax-free surplus balance in respect of the corporation immediately before the adjustment time, and

        • (B) either

          • (I) if there is more than one acquired affiliate, the amount designated by the corporation, in its return of income for the taxation year in which the taxation year of the acquired affiliate that includes the acquisition time ends, in respect of the acquired affiliate, or

          • (II) in any other case, the amount determined under clause (A);

    • (b) at the time that is immediately after the acquisition time, under subparagraph (vi.1) of the description of A in the definition exempt surplus in subsection 5907(1) in computing the deficit affiliate’s exempt deficit in respect of the corporation, the total of all amounts each of which is the amount determined in respect of an acquired affiliate by the formula

      C × D

      where

      C
      is the amount determined under paragraph (a) in respect of the acquired affiliate, and
      D
      is the percentage that would, if the deficit affiliate were resident in Canada, be the deficit affiliate’s surplus entitlement percentage immediately before the acquisition time in respect of the acquired affiliate; and
    • (c) at the time that is immediately after the acquisition time, under subparagraph (vi.1) of the description of A in the definition exempt surplus in subsection 5907(1) in computing the exempt surplus or exempt deficit of any other foreign affiliate (referred to in this paragraph and paragraph (7.6)(b) as a “subordinate affiliate”) of the corporation, in respect of the corporation, that has immediately before the acquisition time a direct equity percentage (within the meaning assigned by subsection 95(4) of the Act) in the acquired affiliate and in which, immediately before the acquisition time, the deficit affiliate does not have an equity percentage (within the meaning assigned by subsection 95(4) of the Act), the amount determined by the formula

      E × F

      where

      E
      is the amount determined under paragraph (a) in respect of the acquired affiliate, and
      F
      is the percentage that would, if the subordinate affiliate were resident in Canada, be the subordinate affiliate’s surplus entitlement percentage immediately before the acquisition time in respect of the acquired affiliate if the subordinate affiliate owned no shares of the capital stock of any corporation other than its shares of the capital stock of the acquired affiliate.
  • (7.3) Subsection (7.4) applies if

    • (a) the lesser of

      • (i) the deficit affiliate’s exempt deficit in respect of the corporation immediately before the acquisition time, and

      • (ii) the total of all amounts each of which is the amount, if any, that is the product obtained by multiplying

        • (A) the tax-free surplus balance immediately before the acquisition time in respect of the corporation of an acquired affiliate, and

        • (B) the surplus entitlement percentage of the corporation in respect of that acquired affiliate immediately before the acquisition time

    exceeds

    • (b) the total of all amounts each of which is the amount, if any, that is the product obtained by multiplying

      • (i) the amount, if any, actually designated under subclause (7.2)(a)(ii)(B)(I) in respect of an acquired affiliate, and

      • (ii) the surplus entitlement percentage of the corporation in respect of that acquired affiliate immediately before the acquisition time.

  • (7.4) If this subsection applies, the amount designated by the corporation in respect of a particular acquired affiliate is deemed, for the purposes of subclause (7.2)(a)(ii)(B)(I),

    • (a) to be the amount determined by the Minister in respect of the particular acquired affiliate; and

    • (b) not to be the amount, if any, actually designated under subclause (7.2)(a)(ii)(B)(I).

  • (7.5) Subsection (7.6) applies if

    • (a) subsection (7.2) applies;

    • (b) the deficit affiliate, or any other foreign affiliate of the corporation in which the deficit affiliate has, immediately before the acquisition time, an equity percentage (which percentage has, for the purposes of this subsection, the meaning assigned by subsection 95(4) of the Act and which deficit affiliate or other affiliate is referred to in subsection (7.6) as the “direct holder”), has, immediately before the acquisition time, a direct equity percentage (within the meaning assigned by that subsection 95(4)) in any other foreign affiliate (referred to in paragraph (c) and subsection (7.6) as the “subject affiliate”) of the corporation; and

    • (c) the subject affiliate is the acquired affiliate or has, immediately before the acquisition time, an equity percentage in the acquired affiliate.

  • (7.6) Subject to paragraph 5908(11)(c), for the purposes of paragraph 92(1.1)(a) of the Act, if this subsection applies, there shall be added, in computing on and after the adjustment time

    • (a) the direct holder’s adjusted cost base of a share of the capital stock of the subject affiliate, the amount determined by the formula

       A × B

      where

      A
      is the amount determined under paragraph (7.2)(a) in respect of the acquired affiliate, and
      B
      is the percentage that would, if the direct holder were resident in Canada, be the direct holder’s surplus entitlement percentage in respect of the acquired affiliate immediately before the acquisition time if the direct holder owned only the share; and
    • (b) the subordinate affiliate’s adjusted cost base of a share of the capital stock of the acquired affiliate, the amount determined by the formula

      C × D

      where

      C
      is the amount determined under paragraph (7.2)(a) in respect of the acquired affiliate, and
      D
      is the percentage that would, if the subordinate affiliate were resident in Canada, be the subordinate affiliate’s surplus entitlement percentage in respect of the acquired affiliate immediately before the acquisition time if the subordinate affiliate owned only the share.
  • (7.7) For the purposes of paragraph 93(3)(c) of the Act, if an amount (referred to in this subsection and subsection 5908(12) as the “adjustment amount”) is required by subsection 92(1.1) of the Act to be added in computing, on or after the adjustment time, the adjusted cost base of a share of the capital stock of a foreign affiliate of a corporation resident in Canada,

    • (a) where paragraph 92(1.1)(a) of the Act applies, the prescribed amount is the adjustment amount; and

    • (b) where paragraph 92(1.1)(b) of the Act applies, the prescribed amount is the amount determined under subsection 5908(12).

  • (8) and (9) [Repealed, 2013, c. 34, s. 44]

  • (10) For the purposes of this section, the surplus entitlement at any time of a share owned by a corporation resident in Canada of the capital stock of a foreign affiliate of the corporation in respect of a particular foreign affiliate of the corporation is the portion of

    • (a) the amount that would have been received on the share if the foreign affiliate had at that time paid dividends the aggregate of which on all shares of its capital stock was equal to the amount that would be its net surplus in respect of the corporation at that time assuming that

      • (i) each other foreign affiliate of the corporation in which the foreign affiliate had an equity percentage had immediately before that time paid a dividend equal to its net surplus in respect of the corporation immediately before the dividend was paid, and

      • (ii) any dividend referred to in subparagraph (i) that would be received by another foreign affiliate was received by such other foreign affiliate immediately before any such dividend that it would have paid,

    that may reasonably be considered to relate to

    • (b) the amount that would be the net surplus of the particular affiliate in respect of the corporation at that time assuming that

      • (i) each other foreign affiliate of the corporation in which the particular affiliate had an equity percentage had immediately before that time paid a dividend equal to its net surplus in respect of the corporation immediately before the dividend was paid, and

      • (ii) any dividend referred to in subparagraph (i) that would be received by another foreign affiliate was received by such other foreign affiliate immediately before any such dividend that it would have paid.

  • (11) For the purposes of subsection (10),

    • (a) if a particular foreign affiliate of a corporation has an equity percentage in another foreign affiliate of the corporation that has an equity percentage in the particular affiliate, the amount that would be the net surplus of, or the amount that would be a dividend received by, the particular affiliate is to be determined in a manner that is

      • (i) reasonable in the circumstances, and

      • (ii) consistent with the results that would be obtained if a series of actual dividends had been paid and received by the foreign affiliates of the corporation that are relevant to the determination;

    • (b) if any foreign affiliate of a corporation resident in Canada has issued shares of more than one class of its capital stock, the amount that would be paid as a dividend on the shares of any class is the portion of its net surplus that, in the circumstances, it might reasonably be expected to have paid on all the shares of that class; and

    • (c) if the particular affiliate’s net surplus as determined for the purposes of subsection (10) would, in the absence of this paragraph, be nil the particular affiliate’s net surplus for the purposes of that subsection is deemed to be the greater of

      • (i) the amount of the particular affiliate’s retained earnings, if any, determined at the end of its last taxation year ending before the time referred to in that subsection under accounting principles that are relevant to the particular affiliate for that year, and

      • (ii) the amount determined by the formula

         A × B

        where

        A
        is the amount of the particular affiliate’s total assets determined at the end of that year under accounting principles that are relevant to the particular affiliate for that year, and
        B
        is 25%.
  • (12) [Repealed, 2013, c. 34, s. 84]

  • (13) For the purposes of the definition surplus entitlement percentage in subsection 95(1) of the Act and of this Part, the surplus entitlement percentage at any time of a corporation resident in Canada in respect of a particular foreign affiliate of the corporation is,

    • (a) the percentage that is the corporation’s equity percentage in the particular affiliate at that time if

      • (i) the particular affiliate and each corporation that is relevant to the determination of the corporation’s equity percentage in the particular affiliate have, at that time, only one class of issued shares, and

      • (ii) no foreign affiliate (referred to in this subparagraph as the “upper-tier affiliate”) of the corporation that is relevant to the determination of the corporation’s equity percentage in the particular affiliate has, at that time, an equity percentage in a foreign affiliate (including, for greater certainty, the particular affiliate) of the corporation that has an equity percentage in the upper-tier affiliate; and

    • (b) in any other case, the proportion of 100 that

      • (i) the aggregate of all amounts, each of which is the surplus entitlement at that time of a share owned by the corporation of the capital stock of a foreign affiliate of the corporation in respect of the particular foreign affiliate of the corporation

      is of

      • (ii) the amount determined under paragraph (10)(b) to be the net surplus of the particular affiliate in respect of the corporation at that time.

  • (14) For the purposes of subsections (10), (11) and (13), equity percentage has the meaning that would be assigned by subsection 95(4) of the Act if the reference in paragraph (b) of the definition equity percentage in that subsection to “any corporation” were read as a reference to “any corporation other than a corporation resident in Canada”.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts and regulations. SOR/80-141, s. 4;
  • SOR/85-176, s. 3;
  • SOR/94-686, s. 79(F);
  • SOR/97-505, s. 7;
  • 2013, c. 34, ss. 44, 84.
 
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