Budget 2025 Implementation Act, No. 1 (S.C. 2026, c. 3)

• (e.31) for the purposes of sections 127.44, 127.45, 127.48, 127.49 and 127.491 and Part XII.7, at the end of any particular taxation year ending after the subsidiary was wound up, the parent is deemed to be the same corporation as, and a continuation of, the subsidiary;

• (c) for the purpose of computing the income of the corporation for its taxation year that includes the particular time, paragraph 12(1)(t) shall be read as follows:

  • “(t) the amount deducted under subsection 127(5) or (6), 127.44(3), 127.45(6), 127.48(3), 127.49(6) or 127.491(10) in computing the taxpayer’s tax payable for the year or a preceding taxation year to the extent that it was not included under this paragraph in computing the taxpayer’s income for a preceding taxation year or is not included in an amount determined under paragraph 13(7.1)(e) or 37(1)(e) or subparagraph 53(2)(c)(vi) to (vi.5) or (h)(ii) or the amount determined for I in the definition undepreciated capital cost in subsection 13(21) or L in the definition cumulative Canadian exploration expense in subsection 66.1(6);”.

• Marginal note:Suppression election

  (3.3) For the purposes of paragraph (3)(a), if the liquidation and dissolution is a qualifying liquidation and dissolution of the disposing affiliate and the taxpayer would, in the absence of this subsection and, for greater certainty, after taking into account any election under subsection 93(1), realize a capital gain (the amount of which is referred to in subsection (3.4) as the “capital gain amount”) from the disposition of a disposed share, the taxpayer may elect, in accordance with prescribed rules, that distributed property that was, immediately before the disposition, capital property (that is a share of the capital stock of another foreign affiliate of the taxpayer) of the disposing affiliate be deemed to have been disposed of by the disposing affiliate to the taxpayer for proceeds of disposition equal to the amount claimed (referred to in subsection (3.4) as the “claimed amount”) by the taxpayer in the election.

• (h) the total of all amounts each of which is, if the corporation was a Canadian-controlled private corporation throughout the year or a substantive CCPC at any time in the year,

  • (i) an amount deductible under paragraph 113(1)(a.1) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount determined under sub-subclause 113(1)(a.1)(ii)(A)(II)1 in respect of the dividend, and

  • (ii) the total of the amounts deductible under paragraphs 113(1)(b) and (c) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate if no election was made by the corporation for the particular taxation year under subsection 93.4(3) with respect to that amount (or, if an election was made under subsection 93.4(3), to the extent that the amount was determined under paragraph 93.4(3)(c)) (referred to in this subparagraph as the “low RTF amount”) less the amount determined under clause 113(1)(c)(i)(A) in respect of the low RTF amount,

• (b) in the case of

  • (i) a Canadian-controlled private corporation,

    • (A) an amount deductible under paragraph 113(1)(a) or (d) or subsection 113(2) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount of non-business-income tax (as defined in subsection 126(7)) paid by the corporation to the government of a country other than Canada in respect of the dividend, and

    • (B) if an election was made by the corporation under subsection 93.4(3) for the particular taxation year, the total of the amounts deductible under paragraphs 113(1)(b) and (c) in computing the taxable income of the corporation for the year in respect of a dividend received on a share of the capital stock of a foreign affiliate to the extent that the amount was determined under paragraph 93.4(3)(b) (referred to in this clause as the “high RTF amount”) less the amount determined under clause 113(1)(c)(i)(A) in respect of the high RTF amount, and

  • (ii) a deposit insurance corporation,

    • (A) an amount deductible under paragraph 113(1)(a) or (d) or subsection 113(2) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount of non-business-income tax (as defined in subsection 126(7)) paid by the corporation to the government of a country other than Canada in respect of the dividend,

    • (B) an amount deductible under paragraph 113(1)(a.1) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount determined under sub-subclause 113(1)(a.1)(ii)(A)(II)1 in respect of the dividend, and

    • (C) the total of the amounts deductible under paragraphs 113(1)(b) and (c) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount determined under clause 113(1)(c)(i)(A) in respect of the dividend,

• (A) an amount deductible under paragraph 113(1)(a) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount of non-business-income tax (as defined in subsection 126(7)) paid by the corporation to the government of a country other than Canada in respect of the dividend, and

• (A) an amount deductible under paragraph 113(1)(a) in computing the taxable income of the corporation for the particular taxation year in respect of a dividend received on a share of the capital stock of a foreign affiliate less the amount of non-business-income tax (as defined in subsection 126(7)) paid by the corporation to the government of a country other than Canada in respect of the dividend,

• (a) subsections (2), (5), 20(12) and 39(2.1), sections 90, 93, 93.3, 93.4 (other than subsection 93.4(2)) and 113, paragraphs 128.1(1)(c.3) and (d), section 212.3, subsection 219.1(2) and section 233.4;

• (c) subsections 39(2.1), 40(3.6), 85.1(4.1) and 87(8.31).

Marginal note:Definitions

• 93.4 (1) The following definitions apply in this section.

  FABI surplus

  FABI surplus, of a foreign affiliate (referred to in this definition as the “subject affiliate”) of a corporation at any time, means the amount that would be the subject affiliate’s taxable surplus (as defined in subsection 5907(1) of the Income Tax Regulations) at that time if

  • (a) the amount included in subparagraph (iii) of the description of A in the definition taxable surplus in subsection 5907(1) of the Income Tax Regulations in respect of the portion of any dividend received by the subject affiliate that is prescribed to be paid out of the taxable surplus of the foreign affiliate that paid the dividend were equal to the lesser of

    • (i) that portion, and

    • (ii) the proportion of the payer affiliate’s FABI surplus at the time the dividend was paid that the dividend received is of the whole dividend referred to in paragraph 5900(1)(b) of those Regulations;

  • (b) the amount included in subparagraph (iv) of the description of B in the definition taxable surplus in subsection 5907(1) of the Income Tax Regulations in respect of any whole dividend paid by the subject affiliate were equal to the lesser of

    • (i) the portion of the whole dividend deemed under paragraph 5901(1)(b) of those Regulations to be paid out of the subject affiliate’s taxable surplus, and

    • (ii) the subject affiliate’s FABI surplus at that time; and

  • (c) the only other amounts taken into consideration in determining the subject affiliate’s taxable surplus were amounts that are included in computing

    • (i) the subject affiliate’s net earnings (as defined in subsection 5907(1) of the Income Tax Regulations)

      • (A) in respect of foreign accrual property income that can reasonably be considered to be attributable to its foreign accrual business income in respect of which an election has been made under subsection (2), or

      • (B) from an active business carried on by it in a country, and

    • (ii) the subject affiliate’s net loss (as defined in subsection 5907(1) of the Income Tax Regulations)

      • (A) in respect of foreign accrual property income that can reasonably be considered to be attributable to its foreign accrual business income, or

      • (B) from an active business carried on by it in a country. (surplus REATE)

  foreign accrual business income

  foreign accrual business income, of a foreign affiliate of a taxpayer, for any taxation year of the affiliate, means the amount that would be its foreign accrual property income for the year if that amount were determined

  • (a) taking into consideration only amounts that

    • (i) would not be included in the computation of the affiliate’s aggregate investment income (as defined in subsection 129(4)) if

      • (A) the affiliate were, at all times, a Canadian-controlled private corporation, and

      • (B) all amounts that were included in the computation of the affiliate’s foreign accrual property income for the taxation year were from a source in Canada, and

    • (ii) are not derived from an amount paid or payable, directly or indirectly, by a person or partnership (in this definition referred to as the “payer”) to the affiliate or to a partnership of which the affiliate was a member where

      • (A) the payer is

        • (I) a Canadian-controlled private corporation or a substantive CCPC,

        • (II) a corporation carrying on a personal services business,

        • (III) an individual resident in Canada,

        • (IV) a foreign affiliate (in this definition referred to as the “payer affiliate”) of

          1 any taxpayer of whom the affiliate is a foreign affiliate, or

          2 another taxpayer who does not deal at arm’s length with the affiliate or any taxpayer of whom the affiliate is a foreign affiliate, or

        • (V) a partnership, if any person that is a member of the partnership, directly or indirectly through one or more partnerships, is described in any of subclauses (I) to (IV) (each of which is referred to in this definition as a “relevant member”),

      • (B) if the payer – or where subclause (A)(V) applies, a relevant member – is a person described in any of subclauses (A)(I) to (IV), the payer or relevant member

        • (I) is a taxpayer of whom the affiliate is a foreign affiliate, or

        • (II) does not deal at arm’s length with

          1 the affiliate, or

          2 any taxpayer of whom the affiliate is a foreign affiliate, and

      • (C) the amount paid or payable

        • (I) if the payer or a relevant member is a person described in subclause (A)(I), is deductible in computing the aggregate investment income or reduces the tax otherwise payable under section 123.3 for a taxation year of the payer or the relevant member, as the case may be,

        • (II) if the payer or a relevant member is a person described in subclause (A)(II) or (III), is deductible in computing the income for a taxation year of the payer or the relevant member, as the case may be, and

        • (III) if the payer or a relevant member is a person described in subclause (A)(IV), is deductible in computing the foreign accrual property income, other than foreign accrual business income, for a taxation year of the payer affiliate or the relevant member, as the case may be; and

  • (b) on the basis that

    • (i) sections 5903 and 5903.1 of the Income Tax Regulations were applied, in the manner set out in subparagraph (ii), taking into account only amounts described in paragraph (a), and

    • (ii) the total of the prescribed amounts for the year under subsections 5903(1) and 5903.1(1) of the Income Tax Regulations were the lesser of

      • (A) the affiliate’s foreign accrual property income for the year determined taking into account only amounts described under paragraph (a) and without regard to any amount determined for F and F.1 in the formula in the definition foreign accrual property income in subsection 95(1) for the year, and

      • (B) the total of the maximum amounts permitted to be designated under subsections 5903(1) and 5903.1(1) of the Income Tax Regulations for the year. (revenu étranger accumulé, tiré d’une entreprise)

  underlying FABI surplus tax

  underlying FABI surplus tax, of a foreign affiliate of a corporation in respect of the corporation, at any time, means the portion of the underlying foreign tax (as defined in subsection 5907(1) of the Income Tax Regulations) of the affiliate in respect of the corporation at that time that can reasonably be regarded as applicable in respect of the affiliate’s FABI surplus. (montant intrinsèque d’impôt REATE)

• Marginal note:Amounts deductible under subsection 91(4)

  (2) If a taxpayer is a Canadian-controlled private corporation or a substantive CCPC at any time in a taxation year, or is a partnership all the members of which (other than non-resident persons) are corporations in the year, and the taxpayer files an election in prescribed form and manner by the taxpayer’s filing-due date for the year (or, if the taxpayer is a partnership, on or before the day on which a return is required by section 229 of the Income Tax Regulations to be filed in respect of the year or would be required to so be filed if that section applied to the partnership) for the purpose of determining the amount deductible by the taxpayer in computing its income for the year under subsection 91(4) in respect of an income amount (within the meaning of that subsection) in respect of a share of the capital stock of a controlled foreign affiliate of the taxpayer,

  • (a) the amount deductible under subsection 91(4) in respect of the portion of the income amount that may reasonably be regarded as attributable to the foreign accrual business income of any controlled foreign affiliate (in this subsection referred to as the “FABI amount”) is to be determined separately from the amount deductible under subsection 91(4) in respect of the portion of the income amount other than the FABI amount (in this subsection referred to as the “excess amount”); and

  • (b) in determining each of the amounts referred to in paragraph (a),

    • (i) the amount deductible under subsection 91(4) in respect of the FABI amount is to be determined as though

      • (A) the references in subsection 91(4) to the “income amount” were references to the “FABI amount”, and

      • (B) paragraph (a) of the definition relevant tax factor in subsection 95(1) were read without the references to “(other than a Canadian-controlled private corporation or a corporation that is a substantive CCPC at any time in the year)”, and

    • (ii) the amount deductible under subsection 91(4) in respect of the excess amount is to be determined as though the references in subsection 91(4) to the “income amount” were references to the “excess amount”.

• Marginal note:Dividends from foreign affiliates

  (3) If, at any particular time in a taxation year, a corporation that is a Canadian-controlled private corporation or a substantive CCPC at any time in the year (referred to in this subsection as the “recipient corporation”) receives a dividend on a share owned by it of the capital stock of a foreign affiliate of the recipient corporation, any portion of the dividend is prescribed to be paid out of taxable surplus of the affiliate (referred to in this subsection as the “taxable surplus dividend”) and an election is made by the recipient corporation in prescribed form and manner by its filing-due date for the taxation year, paragraphs 113(1)(b) and (c) and any regulations made for the purposes of those provisions are to be applied to the taxable surplus dividend as follows:

  • (a) the portion of the taxable surplus dividend that is considered to be paid out of the affiliate’s FABI surplus (referred to in this subsection as the “FABI surplus dividend”) is equal to the lesser of

    • (i) the taxable surplus dividend, and

    • (ii) the proportion of the foreign affiliate’s FABI surplus at the time of the dividend payment that the dividend is of the whole dividend referred to in subparagraph 5900(1)(b)(ii) of the Income Tax Regulations;

  • (b) the amounts deductible by the recipient corporation under paragraphs 113(1)(b) and (c) in respect of the FABI surplus dividend are determined as though

    • (i) each reference to “such portion of the dividend as is prescribed to have been paid out of taxable surplus” in subparagraph 113(1)(b)(i), clause 113(1)(c)(i)(A) and subparagraph 113(1)(c)(ii) and the reference to “that portion of the dividend” in subparagraph 113(1)(b)(ii) were a reference to “the FABI surplus dividend”,

    • (ii) the reference to the “foreign tax prescribed to be applicable” in paragraph 113(1)(b) were a reference to the amount that would be the underlying foreign tax applicable (as defined in subsection 5907(1) of the Income Tax Regulations) in respect of the recipient corporation to the whole dividend if that amount consisted solely of the affiliate’s underlying FABI surplus tax at the particular time in respect of the recipient corporation, and

    • (iii) the definition relevant tax factor in subsection 95(1) were read without reference to the words “(other than a Canadian-controlled private corporation or a corporation that is a substantive CCPC at any time in the year)”; and

  • (c) the amounts deductible under paragraphs 113(1)(b) and (c) in respect of the portion of the taxable surplus dividend other than the FABI surplus dividend are determined as though

    • (i) each reference to “such portion of the dividend as is prescribed to have been paid out of taxable surplus” in subparagraph 113(1)(b)(i), clause 113(1)(c)(i)(A) and subparagraph 113(1)(c)(ii) and the reference to “that portion of the dividend” in subparagraph 113(1)(b)(ii) refer to the portion of the taxable surplus dividend other than the FABI surplus dividend, and

    • (ii) the reference to “the foreign tax prescribed to be applicable to such portion of the dividend” in subparagraph 113(1)(b)(i) refers to the foreign affiliate’s underlying foreign tax applicable (as defined in subsection 5907(1) of the Income Tax Regulations) determined without regard to the affiliate’s underlying FABI surplus tax.

• Marginal note:Pre-2023 taxation years

  (4) An election is deemed to have been timely made by a taxpayer under subsection (2) for each of its taxation years that begin before April 7, 2022, if

  • (a) an election is made by the taxpayer in prescribed form and manner on or before the filing-due date for the taxpayer’s first taxation year that begins after 2025, or

  • (b) where the taxpayer is a partnership, an election is made, by or on behalf of the partnership, in prescribed form and manner on or before the day on which a return is required by section 229 of the Income Tax Regulations to be filed in respect of the first fiscal period that begins after 2025 or would be required to be filed if that section applied to the partnership.

• Marginal note:Pre-2026 taxation years

  (5) An election is deemed to have been timely made by a taxpayer under subsection (2), and under subsection (3) as applicable, for each of its taxation years that begin after April 6, 2022 and before 2026, if

  • (a) an election is made by the taxpayer in prescribed form and manner on or before the filing-due date for the taxpayer’s first taxation year that begins after 2025, or

  • (b) where the taxpayer is a partnership, an election is made, by or on behalf of the partnership, in prescribed form and manner on or before the day on which a return is required by section 229 of the Income Tax Regulations to be filed in respect of the first fiscal period that begins after 2025 or would be required to be filed if that section applied to the partnership.

• Marginal note:Tax-free surplus balance computation

  (6) If a taxpayer has made an election under this section in respect of any taxation year, the tax-free surplus balance (as defined in subsection 5905(5.5) of the Income Tax Regulations) of a foreign affiliate of the taxpayer (or, if the taxpayer is a partnership, a foreign affiliate of a member of the partnership) at any time in the taxation year and any subsequent taxation year is to be determined as if subparagraph 5905(5.5)(b)(i) of the Income Tax Regulations were read as follows:

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

    A + B

    where

    A

    is the lesser of

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

      C × D

      where

      C

      is the affiliate’s underlying FABI surplus tax (as defined in subsection 93.4(1) of the Act) in respect of the corporation at that time, and

      D

      is the amount by which the amount that would be the corporation’s relevant tax factor (as defined in subsection 95(1) of the Act) for the corporation’s taxation year that includes that time if it were determined under paragraph (a) of that definition, exceeds one, and

    • (B) the affiliate’s FABI surplus (as defined in subsection 93.4(1) of the Act) in respect of the corporation at that time, and

    B

    is the lesser of

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

      E × F

      where

      E

      is the affiliate’s underlying foreign tax other than its underlying FABI surplus tax (as defined in subsection 93.4(1) of the Act) in respect of the corporation at that time, and

      F

      is the amount by which the corporation’s relevant tax factor (as defined in subsection 95(1) of the Act) for the corporation’s taxation year that includes that time, exceeds one, and

    • (B) the affiliate’s taxable surplus other than its FABI surplus (as defined in subsection 93.4(1) of the Act) in respect of the corporation at that time, and