Income Tax Regulations (C.R.C., c. 945)
Full Document:
- HTMLFull Document: Income Tax Regulations (Accessibility Buttons available) |
- XMLFull Document: Income Tax Regulations [5468 KB] |
- PDFFull Document: Income Tax Regulations [7877 KB]
Regulations are current to 2024-10-02 and last amended on 2024-07-01. Previous Versions
PART LIXForeign Affiliates (continued)
- [NOTE: Application provisions are not included in the consolidated text
- see relevant amending Acts and regulations.]
- SOR/94-686, s. 79(F)
Carrying on Business in a Country
5906 (1) For the purposes of this Part, where a foreign affiliate of a corporation resident in Canada carries on an active business, it shall be deemed to carry on that business
(a) in a country other than Canada only to the extent that such business is carried on through a permanent establishment situated therein; and
(b) in Canada only to the extent that its income therefrom is subject to tax under Part I of the Act.
(2) The expression permanent establishment means
(a) for the purposes of paragraph (1)(a) and the definition earnings in subsection 5907(1) (which paragraph or definition is referred to in this paragraph as a “provision”),
(i) if the expression is given a particular meaning in a tax treaty with a country, a permanent establishment within the meaning assigned by that tax treaty with respect to the business carried on in that country by the foreign affiliate referred to in the provision, and
(ii) in any other case, a fixed place of business of the affiliate, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, or if the affiliate does not have any fixed place of business, the principal place at which the affiliate’s business is conducted; and
(b) for the purposes of subdivision i of Division B of Part I of the Act,
(i) if the expression is given a particular meaning in a tax treaty with a country, a permanent establishment within the meaning assigned by that tax treaty if the person or partnership referred to in the relevant portion of that subdivision (which person or partnership is referred to in this paragraph and subsection (3) as the “person”) is a resident of that country for the purpose of that tax treaty, and
(ii) in any other case, a fixed place of business of the person, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, or if the person does not have any fixed place of business, the principal place at which the person’s business is conducted.
(3) For the purposes of subparagraphs (2)(a)(ii) and (b)(ii),
(a) if the affiliate or the person, as the case may be, carries on business through an employee or agent, established in a particular place, who has general authority to contract for the affiliate or the person or who has a stock of merchandise owned by the affiliate or the person from which the employee or agent regularly fills orders, the affiliate or the person is deemed to have a fixed place of business at that place;
(b) if the affiliate or the person, as the case may be, is an insurance corporation, the affiliate or the person is deemed to have a fixed place of business in each country in which the affiliate or the person is registered or licensed to do business;
(c) if the affiliate or the person, as the case may be, uses substantial machinery or equipment at a particular place at any time in a taxation year, the affiliate or the person is deemed to have a fixed place of business at that place;
(d) the fact that the affiliate or the person, as the case may be, has business dealings through a commission agent, broker or other independent agent or maintains an office solely for the purchase of merchandise at a particular place does not of itself mean that the affiliate or the person has a fixed place of business at that place; and
(e) the fact that the affiliate or the person, as the case may be, has a subsidiary controlled corporation at a place or a subsidiary controlled corporation engaged in trade or business at a place does not of itself mean that the affiliate or person has a fixed place of business at that place.
- [NOTE: Application provisions are not included in the consolidated text
- see relevant amending Acts and regulations.]
- SOR/94-686, s. 79(F)
- 2009, c. 2, s. 111
- 2013, c. 34, s. 45
Interpretation
5907 (1) For the purposes of this Part,
- active business
active business has the meaning assigned by subsection 95(1) of the Act; (entreprise exploitée activement)
- controlled foreign affiliate
controlled foreign affiliate has the meaning assigned by subsection 95(1) of the Act; (société étrangère affiliée contrôlée)
- designated person or partnership
designated person or partnership, in respect of a taxpayer at any time, means
(a) the taxpayer,
(b) a person or partnership that is at that time
(i) a person (other than a partnership) that does not, at that time, deal at arm’s length with the taxpayer, or
(ii) a partnership a member of which is, at that time, a designated person or partnership in respect of the taxpayer under this definition, and
(c) if a foreign affiliate of the taxpayer is an original corporation that undergoes a division in respect of which subsection 15(1.5) of the Act applies, a new corporation in respect of the division; (personne ou société de personnes désignée)
- earnings
earnings of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business means
(a) in the case of an active business carried on by it in a country,
(i) the income or profit from the active business for the year computed in accordance with the income tax law of the country in which the affiliate is resident, in any case where the affiliate is required by that law to compute that income or profit,
(ii) the income or profit from the active business for the year computed in accordance with the income tax law of the country in which the business is carried on, in any case not described in subparagraph (i) where the affiliate is required by that law to compute that income or profit, and
(iii) in any other case, the amount that would be the income from the active business for the year under Part I of the Act if the business were carried on in Canada, the affiliate were resident in Canada and the Act were read without reference to subsections 12.7(3), 18(4), 18.2(2), 18.4(4), 80(3) to (12), (15) and (17) and 80.01(5) to (11) and sections 80.02 to 80.04,
adjusted in each case in accordance with subsections (2), (2.1), (2.2) and (2.9) and, for the purpose of this Part, to the extent that the earnings of an affiliate from an active business carried on by it cannot be attributed to a permanent establishment in any particular country, they shall be attributed to the permanent establishment in the country in which the affiliate is resident and, if the affiliate is resident in more than one country, to the permanent establishment in the country that may reasonably be regarded as the affiliate’s principal place of residence, and
(b) in any other case, the total of all amounts each of which is an amount of income that would be required under paragraph 95(2)(a) or subsection 95(2.44) of the Act to be included in computing the affiliate’s income or loss from an active business for the year if that income were computed taking into account the rules in subsection (2.03); (gains)
- exempt deficit
exempt deficit of a foreign affiliate of a corporation in respect of the corporation at any time means the amount, if any, by which
(a) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vi) of the description of B in the definition exempt surplus in this subsection
exceeds
(b) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vii) of the description of A in that definition; (déficit exonéré)
- exempt earnings
exempt earnings, of a particular foreign affiliate of a particular corporation for a taxation year of the particular affiliate, means, subject to subsection (2.02), the total of all amounts each of which is
(a) the amount by which the capital gains of the particular affiliate for the year (other than capital gains included in computing the amount, at any time in the year, of the particular affiliate’s hybrid surplus, or hybrid deficit, in respect of the particular corporation) exceed the total of
(i) the amount of the taxable capital gains for the year referred to in the description of B in the definition foreign accrual property income in subsection 95(1) of the Act,
(ii) the amount of the taxable capital gains for the year referred to in subparagraphs (c)(i), (e)(i) and (f)(iv) of the definition net earnings, and
(iii) the portion of any income or profits tax paid to the government of a country for the year by the particular affiliate that can reasonably be regarded as tax in respect of the amount by which the capital gains of the particular affiliate for the year exceed the total of the amounts referred to in subparagraphs (i) and (ii),
(a.1) the amount determined by the formula
A – B
where
- A
- is the total of all amounts each of which is a particular amount that would be included, in respect of a particular business of the particular affiliate, by paragraph (c), (c.1) or (c.2) of the definition capital dividend account in subsection 89(1) of the Act in determining the particular affiliate’s capital dividend account at the end of the year if
(i) the particular affiliate were the corporation referred to in that definition,
(ii) the references in paragraphs (c.1) and (c.2) of that definition, and in paragraph (c) of that definition as that paragraph (c) read in its application to taxation years that ended before February 28, 2000, to “a business” were read as references to a business that
(A) is not an active business (as defined in subsection 95(1) of the Act), or
(B) is an active business (as defined in that subsection 95(1)) the particular affiliate’s earnings from which for the year are determined under subparagraph (a)(iii) of the definition earnings, and
(iii) the particular amount did not include any amount that can reasonably be considered to have accrued while no person or partnership that carried on the particular business was a specified person or partnership (within the meaning of section 95 of the Act) in respect of the particular corporation, and
- B
- is the amount determined for A at the end of the particular affiliate’s taxation year that immediately precedes the year,
(b) where the year is the 1975 or any preceding taxation year of the particular affiliate, the total of all amounts each of which is the particular affiliate’s net earnings for the year,
(c) where the year is the 1975 or any preceding taxation year of the particular affiliate, the earnings as determined in paragraph (b) of the definition earnings in this subsection to the extent that those earnings have not been included because of paragraph (b) or deducted in determining an amount included in subparagraph (b)(i) of the definition exempt loss in this subsection,
(d) where the year is the 1976 or any subsequent taxation year of the particular affiliate and the particular affiliate is, throughout the year, resident in a designated treaty country,
(i) the particular affiliate’s net earnings for the year from an active business carried on by it in Canada or a designated treaty country, or
(ii) the particular affiliate’s earnings for the year from an active business to the extent that they derive from
(A) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(i) of the Act and that would
(I) if earned by the other foreign affiliate referred to in subclause 95(2)(a)(i)(A)(I) or (IV) of the Act, be included in computing the exempt earnings or exempt loss of the other foreign affiliate for a taxation year,
(II) if earned by the life insurance corporation referred to in subclause 95(2)(a)(i)(A)(II) of the Act and based on the assumptions contained in subclause 95(2)(a)(i)(B)(II) of the Act, be included in computing the exempt earnings or exempt loss of the life insurance corporation for a taxation year, or
(III) if earned from the active business activities carried on by the particular affiliate, or the partnership referred to in subclause 95(2)(a)(i)(A)(III) of the Act, be included in computing the exempt earnings or exempt loss of the particular affiliate for a taxation year,
(B) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(A) of the Act where the income is derived from amounts that are paid or payable by the life insurance corporation referred to in that clause and are for expenditures that would, if that life insurance corporation were a foreign affiliate of the particular corporation, be deductible in computing its exempt earnings or exempt loss for a taxation year,
(C) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(B) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that are deductible in computing the exempt earnings or exempt loss, for a taxation year, of the other foreign affiliate referred to in that clause,
(D) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(C) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that are deductible in computing its exempt earnings or exempt loss for a taxation year,
(E) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(D) of the Act if
(I) the second and third affiliates referred to in subclause 95(2)(a)(ii)(D)(IV) of the Act are each resident in a designated treaty country throughout their relevant taxation years (within the meaning assigned by that subclause), and
(II) that income would be required to be so included if
1 paragraph (a) of the definition excluded property in subsection 95(1) of the Act were read as follows:
(a) used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business carried on by it in a designated treaty country (within the meaning assigned by subsection 5907(11) of the Income Tax Regulations),
2 paragraph (c) of that definition excluded property were read as follows:
(c) property all or substantially all of the income from which is, or would be, if there were income from the property, income from an active business (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph (2)(a) if that paragraph were read without reference to subparagraph (v)) that is included in computing the foreign affiliate’s exempt earnings, or exempt loss, as defined in subsection 5907(1) of the Income Tax Regulations, for a taxation year,
(F) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iii) of the Act to the extent that the trade accounts receivable referred to in that subparagraph arose in the course of an active business carried on by the other foreign affiliate referred to in that subparagraph the income or loss from which is included in computing its exempt earnings or exempt loss for a taxation year,
(G) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iv) of the Act to the extent that the loans or lending assets referred to in that subparagraph arose in the course of an active business carried on by the other foreign affiliate referred to in that subparagraph the income or loss from which is included in computing its exempt earnings or exempt loss for a taxation year,
(H) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(v) of the Act, where all or substantially all of its income, from the property described in that subparagraph, is, or would be if there were income from the property, income from an active business (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph 95(2)(a) of the Act if that paragraph were read without reference to its subparagraph (v) and, for greater certainty, excludes income arising as a result of the disposition of the property) that is included in computing its exempt earnings or exempt loss for a taxation year,
(I) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(vi) of the Act, where the agreement for the purchase, sale or exchange of currency referred to in that subparagraph can reasonably be considered to have been made by the particular affiliate to reduce its risk with respect to an amount of income or loss that is included in computing its exempt earnings or exempt loss for a taxation year, or
(J) an amount that is required to be included in computing the particular affiliate’s income from an active business for the year under subsection 95(2.44) of the Act if the amount is in respect of income that would, in the absence of paragraph 95(2)(a.3) of the Act, be income from an active business carried on by the particular affiliate in a designated treaty country, or
(e) where the year is the 1976 or any subsequent taxation year of the particular affiliate, each amount that is included in the particular affiliate’s exempt earnings for the year because of subsection (10),
minus the portion of any income or profits tax paid to the government of a country for the year by the particular affiliate that can reasonably be regarded as tax in respect of the earnings referred to in paragraph (c) or in subparagraph (d)(ii); (gains exonérés)
- exempt loss
exempt loss, of a foreign affiliate of a corporation for a taxation year of the affiliate, means, subject to subsection (2.02), the total of all amounts each of which is
(a) the amount by which the capital losses of the affiliate for the year (other than capital losses included in computing the amount, at any time in the year, of the particular affiliate’s hybrid surplus, or hybrid deficit, in respect of the particular corporation) exceed the total of
(i) the amount of the allowable capital losses for the year referred to in the description of E in the definition foreign accrual property income in subsection 95(1) of the Act,
(ii) the amount of the allowable capital losses for the year referred to in subparagraphs (c)(i), (e)(i) and (f)(iv) of the definition net loss, and
(iii) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax refunded in respect of the amount by which the capital losses of the affiliate for the year exceed the total of the amounts referred to in subparagraphs (i) and (ii),
(a.1) the total of all amounts each of which is the portion of an eligible capital expenditure of the affiliate, in respect of a business of the affiliate, that was not included at any time in the affiliate’s cumulative eligible capital in respect of the business, if
(i) the business
(A) is not an active business (as defined in subsection 95(1) of the Act), or
(B) is an active business (as defined in subsection 95(1) of the Act) the affiliate’s earnings from which for the year are determined under subparagraph (a)(iii) of the definition earnings, and
(ii) in computing its income for the year, the affiliate has deducted an amount described in paragraph 24(1)(a) of the Act for the year in respect of the business,
(b) where the year is the 1975 or any preceding taxation year of the affiliate, the total of all amounts each of which is
(i) the affiliate’s net loss for the year from an active business carried on by it in a country, or
(ii) the amount, if any, for the year by which
(A) the amount determined under the description of D in the definition foreign accrual property income in subsection 95(1) of the Act for the year
exceeds
(B) the amount determined under the description of A in the definition foreign accrual property income in subsection 95(1) of the Act for the year,
(c) where the year is the 1976 or any subsequent taxation year of the affiliate and the affiliate is, throughout the year, resident in a designated treaty country,
(i) the affiliate’s net loss for the year from an active business carried on by it in Canada or a designated treaty country, or
(ii) the amount by which
(A) the affiliate’s loss for the year from an active business to the extent determined under subparagraph (d)(ii) of the definition exempt earnings in respect of the year with any modifications that the circumstances require
exceeds
(B) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under clause (A), or
(d) where the year is the 1976 or any subsequent taxation year of the affiliate, each amount that is included in the affiliate’s exempt loss for the year because of subsection (10); (perte exonérée)
- exempt surplus
exempt surplus, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the latest of the following times and that ends with the particular time:
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) the last time for which the opening exempt surplus of the subject affiliate in respect of the corporation was required to be determined under section 5905, and
(c) the last time for which the opening exempt deficit of the subject affiliate in respect of the corporation was required to be determined under section 5905
A – B
where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening exempt surplus, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),
(ii) the exempt earnings of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that
(A) was prescribed by paragraph 5900(1)(a) to have been paid out of the payer affiliate’s exempt surplus in respect of the corporation,
(B) does not give rise to the application of subsection 12.7(3) in computing the foreign accrual property income of a foreign affiliate of a taxpayer, and
(C) would not be deemed under subsection 113(5) of the Act not to be a dividend received by the subject affiliate on a share of the capital stock of the payer affiliate for the purposes of section 113 of the Act, if the subject affiliate were a corporation resident in Canada,
(iv) the portion of any income or profits tax refunded by or the amount of a tax credit paid by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded or paid in respect of any amount referred to in subparagraph (iii) and that was not deducted in determining any amount referred to in subparagraph (iii) of the description of B,
(v) the portion of any taxable dividend received in the period and before the particular time by the subject affiliate that would, if the dividend were received by the corporation, be deductible by it under section 112 of the Act,
(vi) an amount added to the exempt surplus of the subject affiliate or deducted from its exempt deficit in the period and before the particular time under subsection (1.092), (1.1) or (1.2),
(vi.1) each amount that is required, under section 5905, to be included under this subparagraph in the period and before the particular time, or
(vii) an amount added, in the period and before the particular time, to the exempt surplus of the subject affiliate under paragraph (7.1)(d) (as that paragraph applied to dividends paid on or before August 19, 2011), and
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the opening exempt deficit, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (c),
(ii) the exempt loss of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of any amount referred to in subparagraph (iii), (iv) or (v) of the description of A,
(iv) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed by paragraph 5901(1)(a) to have been paid out of the subject affiliate’s exempt surplus in respect of the corporation,
(v) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(d)(xii) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or
(vi) an amount, in the period and before the particular time, deducted from the exempt surplus of the subject affiliate or added to its exempt deficit under subsection (1.092), (1.1) or (1.2); (surplus exonéré)
- hybrid deficit
hybrid deficit, of a foreign affiliate of a corporation in respect of the corporation at any time, means the amount, if any, by which
(a) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vii) of the description of B in the definition hybrid surplus
exceeds
(b) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (v) of the description of A in that definition; (déficit hybride)
- hybrid surplus
hybrid surplus, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the latest of the following times and that ends with the particular time:
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) the last time for which the opening hybrid surplus of the subject affiliate in respect of the corporation was required to be determined under section 5905, and
(c) the last time for which the opening hybrid deficit of the subject affiliate in respect of the corporation was required to be determined under section 5905
A – B
where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening hybrid surplus, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),
(ii) the amount of a capital gain (except to the extent that the taxable portion of the capital gain is included under the description of B in the definition foreign accrual property income in subsection 95(1) of the Act in respect of the subject affiliate), for a taxation year, of the subject affiliate, or of a partnership of which the subject affiliate is a member (to the extent that the capital gain is reasonably attributable to the subject affiliate), in respect of a disposition, at any time in the period, of
(A) a share of the capital stock of another foreign affiliate of the corporation,
(B) a partnership interest, or
(C) a property, that is an excluded property of the subject affiliate because of paragraph (c.1) of the definition excluded property in subsection 95(1) of the Act, that related to
(I) an amount that was receivable under an agreement that relates to the sale of a property that is referred to in clause (A) or (B) the capital gain or capital loss from the sale of which is included under this subparagraph or subparagraph (ii) of the description of B, as the case may be, or
(II) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition excluded property arising in respect of the acquisition of an excluded property of the affiliate that is referred to in clause (A) or (B) any capital gain or capital loss from the disposition of which would, if that excluded property were disposed of, be included under this subparagraph or subparagraph (ii) of the description of B, as the case may be,
(iii) the portion of any income or profits tax refunded by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded in respect of an amount referred to in subparagraph (ii) or (iii) of the description of B,
(iv) the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed under subsection 5905(7) to have been received by the subject affiliate) that
(A) was prescribed under paragraph 5900(1)(a.1) to have been paid out of the payer affiliate’s hybrid surplus in respect of the corporation,
(B) does not give rise to the application of subsection 12.7(3) in computing the foreign accrual property income of a foreign affiliate of a taxpayer, and
(C) would not be deemed under subsection 113(5) of the Act not to be a dividend received by the subject affiliate on a share of the capital stock of the payer affiliate for the purposes of section 113 of the Act, if the subject affiliate were a corporation resident in Canada, or
(v) an amount added to the hybrid surplus of the subject affiliate or deducted from its hybrid deficit in the period and before the particular time under subsection (1.092), (1.1) or (1.2), and
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the opening hybrid deficit, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (c),
(ii) the amount of a capital loss (except to the extent that the allowable portion of the capital loss is included under paragraph (a) of the description of E in the definition foreign accrual property income in subsection 95(1) of the Act in respect of the subject affiliate), for a taxation year, of the subject affiliate, or of a partnership of which the subject affiliate is a member (to the extent that the capital loss is reasonably attributable to the subject affiliate), in respect of a disposition, at any time in the period, of
(A) a share of the capital stock of another foreign affiliate of the corporation,
(B) a partnership interest, or
(C) a property, that is an excluded property of the subject affiliate because of paragraph (c.1) of the definition excluded property in subsection 95(1) of the Act, that related to
(I) an amount that was receivable under an agreement that relates to the sale of a property that is referred to in clause (A) or (B) the capital gain or capital loss from the sale of which is included under subparagraph (ii) of the description of A or this subparagraph, as the case may be, or
(II) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition excluded property arising in respect of the acquisition of an excluded property of the affiliate that is referred to in clause (A) or (B) any capital gain or capital loss from the disposition of which would, if that excluded property were disposed of, be included under subparagraph (ii) of the description of A or this subparagraph, as the case may be,
(iii) the amount of a capital loss for a taxation year of the subject affiliate that would arise in respect of a disposition, at any time in the period, of a share of the capital stock of another foreign affiliate of the corporation in the course of the liquidation and dissolution of that other affiliate if subclause 95(2)(e)(iv)(A)(II) of the Act were read without reference to its sub-subclause 1 and section 93 of the Act were read without reference to its subsection (4),
(iv) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of an amount referred to in subparagraph (ii) or (iv) of the description of A,
(v) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(a.1) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(b) to have been paid out of the subject affiliate’s hybrid surplus in respect of the corporation,
(vi) each amount that is required under section 5902 to be included under this subparagraph in the period and before the particular time, or
(vii) an amount deducted from the hybrid surplus of the subject affiliate or added to its hybrid deficit in the period and before the particular time under subsection (1.092), (1.1) or (1.2); (surplus hybride)
- hybrid underlying tax
hybrid underlying tax, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the later of the following times and that ends with the particular time:
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation, and
(b) the last time for which the opening hybrid underlying tax of the subject affiliate in respect of the corporation was required to be determined under section 5905
A – B
where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening hybrid underlying tax, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),
(ii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of any amount referred to in subparagraph (ii) or (iv) of the description of A in the definition hybrid surplus,
(iii) each amount that was prescribed by paragraph 5900(1)(c.1) to have been the foreign tax applicable to the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed under subsection 5905(7) to have been received by the subject affiliate) that was prescribed by paragraph 5900(1)(a.1) to have been paid out of the payer affiliate’s hybrid surplus in respect of the corporation, or
(iv) the amount by which the subject affiliate’s hybrid underlying tax is required to be increased in the period and before the particular time under subsection (1.092), (1.1) or (1.2),
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the portion of any income or profits tax refunded by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded in respect of an amount referred to in subparagraph (ii) or (iii) of the description of B in the definition hybrid surplus,
(ii) the hybrid underlying tax applicable to any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(a.1) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(b) to have been paid out of the subject affiliate’s hybrid surplus in respect of the corporation before that time,
(iii) each amount that is required under section 5902 to be included under this subparagraph in the period and before the particular time, or
(iv) the amount by which the subject affiliate’s hybrid underlying tax is required to be decreased in the period and before the particular time under subsection (1.092), (1.1) or (1.2); (montant intrinsèque d’impôt hybride)
- hybrid underlying tax applicable
hybrid underlying tax applicable, in respect of a corporation to a whole dividend paid at any time on the shares of any class of the capital stock of a foreign affiliate of the corporation by the affiliate, means the proportion of the hybrid underlying tax of the affiliate at that time in respect of the corporation that
(a) the portion of the whole dividend deemed to have been paid out of the affiliate’s hybrid surplus in respect of the corporation
is of
(b) the affiliate’s hybrid surplus at that time in respect of the corporation; (montant intrinsèque d’impôt hybride applicable)
- loss
loss, of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business, means
(a) in the case of an active business carried on by it in a country, the amount of its loss for the year from the active business carried on in the country computed by applying the provisions of paragraph (a) of the definition earnings respecting the computation of earnings from that active business carried on in that country, with any modifications that the circumstances require, and
(b) in any other case, the total of all amounts each of which is an amount of a loss that would be required under paragraph 95(2)(a) of the Act to be included in computing the affiliate’s income or loss from an active business for the year if that loss were computed taking into account the rules in subsection (2.03); (perte)
- net earnings
net earnings of a foreign affiliate of a corporation for a taxation year of the affiliate
(a) from an active business carried on by it in a country is the amount of its earnings for the year from that active business carried on in that country minus the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax in respect of those earnings,
(b) in respect of foreign accrual property income is the amount that would be its foreign accrual property income for the year, if the formula in the definition foreign accrual property income in subsection 95(1) of the Act were read without reference to F and F.1 in that formula and the amount determined for E in that formula were the amount determined under paragraph (a) of the description of E in that formula and the Act were read without regard to its clause 95(2)(f.11)(ii)(D), minus the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax in respect of that income,
(c) from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada) is the amount, if any, by which
(i) the portion of the affiliate’s taxable capital gains for the year from those dispositions that can reasonably be considered to have accrued after November 12, 1981
exceeds
(ii) the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax in respect of the amount determined under subparagraph (i),
(d) [Repealed, 2013, c. 34, s. 85]
(e) from the disposition of a property that is an excluded property of the affiliate that is described in paragraph (c) of the definition excluded property in subsection 95(1) of the Act but that would not be an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition exempt earnings is the amount, if any, by which
(i) the portion of the affiliate’s taxable capital gain for the year from the disposition of the property that accrued after its 1975 taxation year
exceeds
(ii) the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax that was paid in respect of the amount determined under subparagraph (i), and
(f) from a particular disposition of a property, that is an excluded property of the affiliate because of paragraph (c.1) of the definition excluded property in subsection 95(1) of the Act, that related to
(i) an amount that was receivable under an agreement that relates to the sale of a particular property the taxable capital gain or allowable capital loss from the sale of which is included under any of paragraphs (c) to (e) of this definition or of the definition net loss, as the case may be,
(ii) an amount that was receivable and was a property that was described in paragraph (c) of that definition excluded property but that would not have been an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition exempt earnings, or
(iii) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition excluded property arising in respect of the acquisition of an excluded property of the affiliate any taxable capital gain or allowable capital loss from the disposition of which would, if that excluded property were disposed of, be included under any of paragraphs (c) to (e) of this definition or of the definition net loss, as the case may be,
is the amount, if any, by which
(iv) the portion of the affiliate’s taxable capital gain for the year from the particular disposition that accrued after its 1975 taxation year
exceeds
(v) the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax that was paid for the year in respect of the amount determined under subparagraph (iv); (gains nets)
- net loss
net loss of a foreign affiliate of a corporation for a taxation year of the affiliate
(a) from an active business carried on by it in a country is the amount of its loss for the year from that active business carried on in that country minus the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax refunded in respect of that loss,
(b) in respect of foreign accrual property income is the amount, if any, by which
(i) the amount, if any, by which
(A) the total of
(I) the amount that would be determined for D in the formula in the definition foreign accrual property income in subsection 95(1) of the Act for the year, if the Act were read without regard to its clauses 95(2)(f.11)(ii)(D) and (E),
(II) the amount determined under paragraph (a) of the description of E in that formula for the year,
(III) the amount determined for G in that formula for the year, and
(IV) the amount determined for H in that formula for the year
exceeds
(B) the total of the amounts determined under the descriptions of A, A.1, A.2, B and C in the definition foreign accrual property income in subsection 95(1) of the Act for the year
exceeds
(ii) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax refunded in respect of the amount determined under subparagraph (i),
(c) from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada) is the amount, if any, by which
(i) the portion of the affiliate’s allowable capital losses for the year from those dispositions that can reasonably be considered to have accrued after November 12, 1981
exceeds
(ii) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax refunded in respect of the amount determined under subparagraph (i),
(d) [Repealed, 2013, c. 34, s. 85]
(e) from the disposition of a property, that is an excluded property of the affiliate that is described in paragraph (c) of the definition excluded property in subsection 95(1) of the Act but that would not be an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition exempt earnings is the amount, if any, by which
(i) the portion of the affiliate’s allowable capital loss for the year from the disposition of the property that accrued after its 1975 taxation year
exceeds
(ii) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under subparagraph (i), and
(f) from a particular disposition of a property, that is an excluded property of the affiliate because of paragraph (c.1) of the definition excluded property in subsection 95(1) of the Act, that related to
(i) an amount that was receivable under an agreement that relates to the sale of a particular property the taxable capital gain or allowable capital loss from the sale of which is included under any of paragraphs (c) to (e) of this definition or of the definition net earnings, as the case may be,
(ii) an amount that was receivable and was a property that was described in paragraph (c) of that definition excluded property but that would not have been an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition exempt earnings, or
(iii) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition excluded property arising in respect of the acquisition of an excluded property of the affiliate any taxable capital gain or allowable capital loss from the disposition of which would, if that excluded property were disposed of, be included under any of paragraphs (c) to (e) of this definition or of the definition net earnings, as the case may be,
is the amount, if any, by which
(iv) the portion of the affiliate’s allowable capital loss for the year from the particular disposition that accrued after its 1975 taxation year
exceeds
(v) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under subparagraph (iv); (perte nette)
- net surplus
net surplus of a foreign affiliate of a corporation resident in Canada in respect of the corporation is, at any particular time,
(a) if the affiliate has no exempt deficit, no hybrid deficit and no taxable deficit, the amount that is the total of its exempt surplus, hybrid surplus and taxable surplus in respect of the corporation,
(b) if the affiliate has no exempt deficit but has a hybrid deficit and a taxable deficit, the amount, if any, by which its exempt surplus exceeds the total of its hybrid deficit and taxable deficit in respect of the corporation,
(c) if the affiliate has no exempt deficit and no hybrid deficit but has a taxable deficit, the amount, if any, by which the total of its exempt surplus and hybrid surplus exceeds its taxable deficit in respect of the corporation,
(d) if the affiliate has no exempt deficit and no taxable deficit but has a hybrid deficit, the amount, if any, by which the total of its exempt surplus and taxable surplus exceeds its hybrid deficit in respect of the corporation,
(e) if the affiliate has an exempt deficit but no hybrid deficit or taxable deficit, the amount, if any, by which the total of its hybrid surplus and taxable surplus exceeds its exempt deficit in respect of the corporation,
(f) if the affiliate has an exempt deficit and a hybrid deficit but no taxable deficit, the amount, if any, by which its taxable surplus exceeds the total of its exempt deficit and hybrid deficit in respect of the corporation, or
(g) if the affiliate has an exempt deficit and a taxable deficit but no hybrid deficit, the amount, if any, by which its hybrid surplus exceeds the total of its exempt deficit and taxable deficit in respect of the corporation,
as the case may be, at that time; (surplus net)
- taxable deficit
taxable deficit of a foreign affiliate of a corporation in respect of the corporation at any time is the amount, if any, by which
(a) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vi) of the description of B in the definition taxable surplus in this subsection
exceeds
(b) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (v) of the description of A in that definition; (déficit imposable)
- taxable earnings
taxable earnings of a foreign affiliate of a corporation for a taxation year of the affiliate is
(a) where the year is the 1975 or any preceding taxation year of the affiliate, nil, and
(b) in any other case, the total of all amounts each of which is
(i) the affiliate’s net earnings for the year from an active business carried on by it in a country,
(ii) the affiliate’s net earnings for the year in respect of its foreign accrual property income,
(iii) the affiliate’s earnings for the year as determined under paragraph (b) of the definition earnings minus the portion of any income or profits tax paid to the government of a country for a year by the affiliate that can reasonably be regarded as tax in respect of those earnings,
(iv) to the extent not included under subparagraph (ii), the affiliate’s net earnings for the year determined under paragraphs (c) to (f) of the definition net earnings, or
(iv.1) the amount, if any, by which
(A) the total of all amounts each of which is an amount required by paragraph (2.02)(a) to be included under this definition for the year
exceeds
(B) the total of all amounts each of which is an amount required by paragraph (2.02)(b) to be deducted under this definition for the year,
(v) [Repealed, 2013, c. 34, s. 46]
but does not include any amount included in the affiliate’s exempt earnings for the year; (gains imposables)
- taxable loss
taxable loss of a foreign affiliate of a corporation for a taxation year of the affiliate is
(a) where the year is the 1975 or any preceding taxation year of the affiliate, nil, and
(b) in any other case, the total of all amounts each of which is
(i) the affiliate’s net loss for the year from an active business carried on by it in a country,
(ii) the affiliate’s net loss for the year in respect of foreign accrual property income,
(iii) the affiliate’s loss for the year as determined under paragraph (b) of the definition loss minus the portion of any income or profits tax refunded by the government of a country for a year to the affiliate that can reasonably be regarded as tax refunded in respect of that loss, or
(iv) to the extent not included under subparagraph (ii), the affiliate’s net loss for the year determined under paragraphs (c) to (f) of the definition net loss,
but does not include any amount included in the affiliate’s exempt loss for the year; (perte imposable)
- taxable surplus
taxable surplus, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the latest of the following times and that ends with the particular time:
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) the last time for which the opening taxable surplus of the subject affiliate in respect of the corporation was required to be determined under section 5905, and
(c) the last time for which the opening taxable deficit of the subject affiliate in respect of the corporation was required to be determined under section 5905
A – B
where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening taxable surplus, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),
(ii) the taxable earnings of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that
(A) was prescribed by paragraph 5900(1)(b) to have been paid out of the payer affiliate’s taxable surplus in respect of the corporation,
(B) does not give rise to the application of subsection 12.7(3) in computing the foreign accrual property income of a foreign affiliate of a taxpayer, and
(C) would not be deemed under subsection 113(5) of the Act not to be a dividend received by the subject affiliate on a share of the capital stock of the payer affiliate for the purposes of section 113 of the Act, if the subject affiliate were a corporation resident in Canada,
(iv) an amount added to the taxable surplus of the subject affiliate or deducted from its taxable deficit in the period and before the particular time under subsection (1.092), (1.1) or (1.2),
(iv.1) each amount that is required under section 5905 to be included under this subparagraph in the period and before the particular time, or
(v) an amount added, in the period and before the particular time, to the subject affiliate’s taxable surplus under paragraph (7.1)(e) (as that paragraph applied to dividends paid on or before August 19, 2011), and
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the opening taxable deficit, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (c),
(ii) the taxable loss of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of that portion of a dividend referred to in subparagraph (iii) of the description of A,
(iv) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(b) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(a.1) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation,
(v) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(k)(xi) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or
(vi) an amount, in the period and before the particular time, deducted from the taxable surplus of the subject affiliate or added to its taxable deficit under subsection (1.092), (1.1) or (1.2); (surplus imposable)
- underlying foreign tax
underlying foreign tax, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the later of the following times and that ends with the particular time:
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation, and
(b) the last time for which the opening underlying foreign tax of the subject affiliate in respect of the corporation was required to be determined under section 5905
(c) [Repealed, 2013, c. 34, s. 46]
A – B
where
- A
- is, subject to subsection (1.03), the total of all amounts, in respect of the period, each of which is
(i) the opening underlying foreign tax, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),
(ii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of the taxable earnings, including for greater certainty any amounts included because of paragraph (2.02)(a) in computing the taxable earnings, of the affiliate for a taxation year ending in the period,
(iii) the portion of any income or profits tax referred to in subparagraph (iii) of the description of B in the definition taxable surplus in this subsection paid by the subject affiliate in respect of a dividend received from any other foreign affiliate of the corporation,
(iv) each amount that was prescribed by paragraph 5900(1)(d) to have been the foreign tax applicable to the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that was prescribed by paragraph 5900(1)(b) to have been paid out of the payer affiliate’s taxable surplus in respect of the corporation, or
(v) the amount by which the subject affiliate’s underlying foreign tax is required to be increased in the period and before the particular time under subsection (1.092), (1.1) or (1.2),
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the portion of any income or profits tax refunded by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded in respect of the taxable loss of the subject affiliate for a taxation year ending in the period,
(ii) the underlying foreign tax applicable to any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(b) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(a.1) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation before that time,
(iii) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(l)(x) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or
(iv) the amount by which the subject affiliate’s underlying foreign tax is required to be decreased in the period and before the particular time under subsection (1.092), (1.1) or (1.2); (montant intrinsèque d’impôt étranger)
- underlying foreign tax applicable
underlying foreign tax applicable in respect of a corporation to a whole dividend paid at any time on the shares of any class of the capital stock of a foreign affiliate of the corporation by the affiliate is the total of
(a) the proportion of the underlying foreign tax of the affiliate at that time in respect of the corporation that
(i) the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation
is of
(ii) the affiliate’s taxable surplus at that time in respect of the corporation, and
(b) any additional amount in respect of the whole dividend that the corporation claims in its return of income under Part I of the Act in respect of the whole dividend, not exceeding the amount that is the lesser of
(i) the amount by which the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation exceeds the amount determined under paragraph (a), and
(ii) the amount by which the affiliate’s underlying foreign tax in respect of the corporation immediately before the whole dividend was paid exceeds the amount determined under paragraph (a); (montant intrinsèque d’impôt étranger applicable)
- whole dividend
whole dividend paid at any time on the shares of a class of the capital stock of a foreign affiliate of a taxpayer resident in Canada is the total of all amounts each of which is the dividend paid at that time on a share of that class except that
(a) where a dividend is paid at the same time on shares of more than one class of the capital stock of an affiliate, for the purpose only of section 5900, the whole dividend referred to in section 5901 paid at that time on the shares of a class of the capital stock of the affiliate is deemed to be the total of all amounts each of which is the dividend paid at that time on a share of the capital stock of the affiliate,
(b) where a whole dividend is deemed by subparagraph 5902(1)(a)(ii) to have been paid at the same time on shares of more than one class of an affiliate’s capital stock, for the purpose only of that subparagraph, the whole dividend deemed to have been paid at that time on the shares of a class of the affiliate’s capital stock is deemed to be the total of all amounts each of which is a whole dividend deemed to have been paid at that time on the shares of a class of the affiliate’s capital stock, and
(c) where more than one whole dividend is deemed by paragraph 5900(2)(b) to have been paid at the same time on shares of a class of the capital stock of an affiliate, for the purposes only of paragraph 5900(1)(d) and the definitions underlying foreign tax and underlying foreign tax applicable in this subsection, the whole dividend deemed to have been paid at that time on the shares of a class of the capital stock of the affiliate is deemed to be the total of all amounts each of which is a whole dividend deemed to have been paid at that time on the shares of a class of the capital stock of the affiliate and all of that whole dividend shall be deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation. (dividende global)
(1.01) For the purposes of section 113 of the Act, exempt surplus, hybrid surplus and taxable surplus have the meanings assigned by subsection (1).
(1.02) For the purposes of paragraph (d) of the definition exempt earnings and paragraph (c) of the definition exempt loss in subsection (1), if a foreign affiliate of a corporation becomes a foreign affiliate of the corporation in a taxation year of the affiliate, otherwise than as a result of a transaction between persons that do not deal with each other at arm’s length, and the affiliate is resident in a designated treaty country at the end of the year, the affiliate is deemed to be so resident throughout the year.
(1.03) For the purposes of the description of A in the definition underlying foreign tax in subsection (1), income or profits tax paid in respect of the taxable earnings of a particular foreign affiliate of a particular corporation or in respect of a dividend received by the particular affiliate from another foreign affiliate of the particular corporation, and amounts by which the underlying foreign tax of the particular affiliate or any other foreign affiliate of the particular corporation is required under any of subsections (1.092), (1.1) and (1.2) to be increased, is not to include any income or profits tax paid, or amounts by which the underlying foreign tax would otherwise be so required to be increased, as the case may be, in respect of the foreign accrual property income of the particular affiliate for a taxation year of the particular affiliate if, at any time in the year, a specified owner in respect of the particular corporation is considered,
(a) under the income tax laws (referred to in subsection (1.07) as the “relevant foreign tax law”) of any country other than Canada under the laws of which any income of another corporation — that is, at any time in the year, a pertinent person or partnership in respect of the particular affiliate — is subject to income taxation, to own less than all of the shares of the capital stock of the other corporation that are considered to be owned by the specified owner for the purposes of the Act; or
(b) under the income tax laws (referred to in subsection (1.08) as the “relevant foreign tax law”) of any country other than Canada under the laws of which any income of a particular partnership — that is, at any time in the year, a pertinent person or partnership in respect of the particular affiliate — is subject to income taxation, to have a lesser direct or indirect share of the income of the particular partnership than the specified owner is considered to have for the purposes of the Act.
(1.04) For the purposes of subsections (1.03) and (1.07), a specified owner, at any time, in respect of a corporation means the corporation or a person or partnership that is, at that time,
(a) a partnership of which the corporation is a member;
(b) a foreign affiliate of the corporation;
(c) a partnership a member of which is a foreign affiliate of the corporation; or
(d) a person or partnership referred to in any of subparagraphs (1.06)(a)(i) to (iii).
(1.05) For the purposes of this subsection and subsection (1.03), a pertinent person or partnership, at any time, in respect of a particular foreign affiliate of a corporation means the particular affiliate or a person or partnership that is, at that time,
(a) another foreign affiliate of the corporation
(i) in which the particular affiliate has an equity percentage, or
(ii) that has an equity percentage in the particular affiliate;
(b) a partnership a member of which is at that time a pertinent person or partnership in respect of the particular affiliate under this subsection; or
(c) a person or partnership referred to in any of subparagraphs (1.06)(b)(i) to (iii).
(1.06) For the purposes of subsections (1.04) and (1.05), if, as part of a series of transactions or events that includes the earning of the foreign accrual property income referred to in subsection (1.03), a foreign affiliate (referred to in this subsection as the “funding affiliate”) of the corporation or of a person (referred to in this subsection as the “related person”) resident in Canada that is related to the corporation, or a partnership (referred to in this subsection as the “funding partnership”) of which such an affiliate is a member, directly or indirectly provided funding to the particular affiliate, or a partnership of which the particular affiliate is a member, otherwise than by way of loans or other indebtedness that are subject to terms or conditions made or imposed, in respect of the loans or other indebtedness, that do not differ from those that would be made or imposed between persons dealing at arm’s length or by way of an acquisition of shares of the capital stock of any corporation, then
(a) if the funding affiliate is, or the funding partnership has a member that is, a foreign affiliate of the related person, the following persons and partnerships are deemed, at all times during which the foreign accrual property income is earned by the particular affiliate, to be specified owners in respect of the corporation:
(i) the related person,
(ii) each foreign affiliate of the related person, and
(iii) each partnership a member of which is referred to in subparagraph (i) or (ii); and
(b) the following persons and partnerships are deemed, at all times during which the foreign accrual property income is earned by the particular affiliate, to be pertinent persons or partnerships in respect of the particular affiliate:
(i) the funding affiliate or the funding partnership,
(ii) a non-resident corporation
(A) in which the funding affiliate has an equity percentage, or
(B) that has an equity percentage in the funding affiliate, and
(iii) a partnership a member of which is a person or partnership referred to in subparagraph (i) or (ii).
(1.07) For the purposes of paragraph (1.03)(a), a specified owner in respect of the particular corporation is not to be considered, under the relevant foreign tax law, to own less than all of the shares of the capital stock of another corporation that are considered to be owned for the purposes of the Act solely because the specified owner or the other corporation is not treated as a corporation under the relevant foreign tax law.
(1.08) For the purposes of paragraph (1.03)(b), a member of a partnership is not to be considered to have a lesser direct or indirect share of the income of the partnership under the relevant foreign tax law than for the purposes of the Act solely because of one or more of the following:
(a) a difference between the relevant foreign tax law and the Act in the manner of
(i) computing the income of the partnership, or
(ii) allocating the income of the partnership because of the admission to, or withdrawal from, the partnership of any of its members;
(b) the treatment of the partnership as a corporation under the relevant foreign tax law; or
(c) the fact that the member is not treated as a corporation under the relevant foreign tax law.
(1.09) For the purposes of subsection (1.03), if a specified owner owns, for the purposes of the Act, shares of the capital stock of a corporation and the dividends, or similar amounts, in respect of those shares are treated under the income tax laws of any country other than Canada under the laws of which any income of the corporation is subject to income taxation as interest or another form of deductible payment, the specified owner is deemed to be considered, under those tax laws, to own less than all of the shares of the capital stock of the corporation that are considered to be owned by the specified owner for the purposes of the Act.
(1.091) Subsection (1.092) applies in respect of income or profits tax paid by, or refunded to, a foreign affiliate (in this subsection and subsection (1.092) referred to as the “shareholder affiliate”) of a taxpayer for a taxation year of the shareholder affiliate in respect of its income or profits, or loss, as the case may be, and the income or profits, or loss, as the case may be, of another foreign affiliate (in this subsection and subsection (1.092) referred to as the “transparent affiliate”) of the taxpayer if
(a) the shareholder affiliate has an equity percentage in the transparent affiliate;
(b) the income or profits tax is paid to, or refunded by, a government of a country other than Canada; and
(c) under the income tax laws of the country referred to in paragraph (b), the shareholder affiliate, and not the transparent affiliate, is liable for that tax payable to, or entitled to that refund from, a government of that country for that year (otherwise than solely because the shareholder affiliate is part of a group of corporations that determines its liabilities for income or profits tax payable to the government of that country on a consolidated or combined basis).
(1.092) If this subsection applies in respect of income or profits tax paid by, or refunded to, a shareholder affiliate for a taxation year
(a) in respect of the shareholder affiliate,
(i) any such income or profits tax paid by the shareholder affiliate for the year is deemed not to have been paid and any such refund to the shareholder affiliate of income or profits tax otherwise payable by it for the year is deemed not to have been made,
(ii) any such income or profits tax that would have been payable by the shareholder affiliate for the year if the shareholder affiliate had no other taxation year and had not been liable for income or profits tax in respect of income or profits of the transparent affiliate is deemed to have been paid for the year,
(iii) to the extent that
(A) any such income or profits tax that would otherwise have been payable by the shareholder affiliate for the year on behalf of the shareholder affiliate and the transparent affiliate is reduced because of any loss of the shareholder affiliate for the year or any previous taxation year, the amount of such reduction is deemed to have been received by the shareholder affiliate as a refund for the year of the loss of income or profits tax in respect of the loss, and
(B) the shareholder affiliate receives, in respect of a loss of the shareholder affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the shareholder affiliate on behalf of the shareholder affiliate and the transparent affiliate, the amount of such refund is deemed to have been received by the shareholder affiliate as a refund for the year of the loss of income or profits tax in respect of the loss,
(iv) any such income or profits tax that would have been payable by the transparent affiliate for the year if the transparent affiliate had no other taxation year, had no income or profits other than those that are included in computing the income or profits of the shareholder affiliate under the income tax laws referred to in paragraph (1.091)(c) and had been liable, and no other person had been liable, for income or profits tax in respect of income or profits of the transparent affiliate is, at the end of the year,
(A) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the exempt earnings of the transparent affiliate, to be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the shareholder affiliate,
(B) to the extent that such income or profits tax would otherwise have reduced the hybrid surplus or increased the hybrid deficit of the transparent affiliate,
(I) to be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the shareholder affiliate, and
(II) to be added to the hybrid underlying tax of the shareholder affiliate, and
(C) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the taxable earnings of the transparent affiliate,
(I) to be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the shareholder affiliate, and
(II) to be added to the underlying foreign tax of the shareholder affiliate, and
(v) to the extent that the income or profits tax that would otherwise have been payable by the shareholder affiliate for the year on behalf of the shareholder affiliate and the transparent affiliate is reduced because of a loss of the transparent affiliate for the year or a previous taxation year, or to the extent that the shareholder affiliate receives, in respect of a loss of the transparent affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the shareholder affiliate on behalf of the shareholder affiliate and the transparent affiliate, the amount of such reduction or refund, as the case may be, is, at the end of the year of the loss,
(A) to the extent that such loss reduces the exempt surplus or increases the exempt deficit of the transparent affiliate, to be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the shareholder affiliate,
(B) to the extent that such loss reduces the hybrid surplus or increases the hybrid deficit of the transparent affiliate,
(I) to be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the shareholder affiliate, and
(II) to be deducted from the hybrid underlying tax of the shareholder affiliate, and
(C) to the extent that such loss reduces the taxable surplus or increases the taxable deficit of the transparent affiliate,
(I) to be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the shareholder affiliate, and
(II) to be deducted from the underlying foreign tax of the shareholder affiliate;
(b) where, because of the shareholder affiliate being responsible for paying, or claiming a refund of, income or profits tax for the year on behalf of the shareholder affiliate and the transparent affiliate,
(i) an amount is paid to the shareholder affiliate by the transparent affiliate in respect of the income or profits tax that would have been payable by the transparent affiliate for the year had it been liable, and no other person had been liable, for income or profits tax in respect of income or profits of the transparent affiliate,
(A) in respect of the transparent affiliate, the amount so paid is deemed to be a payment of such income or profits tax for the year, and
(B) in respect of the shareholder affiliate,
(I) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the exempt surplus or deducted from the exempt deficit of the transparent affiliate is, at the end of the year, to be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the shareholder affiliate,
(II) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the hybrid surplus or deducted from the hybrid deficit of the transparent affiliate is, at the end of the year, to be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the shareholder affiliate and deducted from the hybrid underlying tax of the shareholder affiliate, and
(III) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the taxable surplus or deducted from the taxable deficit of the transparent affiliate is, at the end of the year, to be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the shareholder affiliate and be deducted from the underlying foreign tax of the shareholder affiliate, or
(ii) an amount is paid by the shareholder affiliate to the transparent affiliate in respect of a reduction or refund, because of a loss or a tax credit of the transparent affiliate for a taxation year, of the income or profits tax that would otherwise have been payable by the shareholder affiliate for the year on behalf of the shareholder affiliate and the transparent affiliate,
(A) in respect of the shareholder affiliate,
(I) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the exempt surplus or included in the exempt deficit of the transparent affiliate is, at the end of the year to which the loss or the tax credit relates, to be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the shareholder affiliate,
(II) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the hybrid surplus or included in the hybrid deficit of the transparent affiliate is, at the end of the year of the loss, to be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the shareholder affiliate and added to the hybrid underlying tax of the shareholder affiliate, and
(III) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the taxable surplus or included in the taxable deficit of the transparent affiliate is, at the end of the year to which the loss or the tax credit relates, to be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the shareholder affiliate and be added to the underlying foreign tax of the shareholder affiliate, and
(B) in respect of the transparent affiliate, the amount is deemed to be a refund to the transparent affiliate, for the year to which the loss or the tax credit relates, of income or profits tax in respect of the loss or the tax credit; and
(c) for the purposes of paragraph (b), any amount paid by a particular transparent affiliate in respect of the shareholder affiliate to another transparent affiliate in respect of the shareholder affiliate in respect of any income or profits tax that would have been payable by the particular transparent affiliate for the year had it been liable, and no other person had been liable, for income or profits tax in respect of income or profits of the transparent affiliate is deemed to have been paid in respect of such tax by the particular transparent affiliate to the shareholder affiliate and to have been paid in respect of such tax by the shareholder affiliate to the other transparent affiliate.
(1.1) For the purposes of this Part, if, under, the income tax laws of a country other than Canada, a group (in this subsection referred to as the “consolidated group”) of two or more foreign affiliates of a corporation resident in Canada determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis and one of the affiliates (in this subsection referred to as the “primary affiliate”) is responsible for paying, or claiming a refund of, such tax on behalf of itself and the other affiliates (in this subsection referred to as the “secondary affiliates”) that are members of the consolidated group, the following rules apply:
(a) in respect of the primary affiliate,
(i) any such income or profits tax paid by the primary affiliate for the year shall be deemed not to have been paid and any refund to the primary affiliate of income or profits tax otherwise payable by it for the year shall be deemed not to have been made,
(ii) any such income or profits tax that would have been payable by the primary affiliate for the year if the primary affiliate had no other taxation year and had not been a member of the consolidated group shall be deemed to have been paid for the year,
(iii) to the extent that
(A) the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group is reduced by virtue of any loss of the primary affiliate for the year or any previous taxation year, or
(B) the primary affiliate receives, in respect of a loss of the primary affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the primary affiliate on behalf of the consolidated group,
the amount of such reduction or refund, as the case may be, shall be deemed to have been received by the primary affiliate as a refund for the year of the loss of income or profits tax in respect of the loss,
(iv) any such income or profits tax that would have been payable by a secondary affiliate for the year if the secondary affiliate had no other taxation year and had not been a member of the consolidated group shall at the end of the year,
(A) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the exempt earnings of the secondary affiliate, be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the primary affiliate,
(A.1) to the extent that such income or profits tax would otherwise have reduced the hybrid surplus or increased the hybrid deficit of the secondary affiliate,
(I) be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the primary affiliate, and
(II) be added to the hybrid underlying tax of the primary affiliate, and
(B) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the taxable earnings of the secondary affiliate,
(I) be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the primary affiliate, and
(II) be added to the underlying foreign tax of the primary affiliate,
(v) to the extent that
(A) the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group is reduced by virtue of a loss of a secondary affiliate for the year or a previous taxation year, or
(B) the primary affiliate receives, in respect of a loss of a secondary affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the primary affiliate on behalf of the consolidated group,
the amount of such reduction or refund, as the case may be, shall at the end of the year of the loss,
(C) where such loss reduces the exempt surplus or increases the exempt deficit, as the case may be, of the secondary affiliate, be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the primary affiliate,
(C.1) where such loss reduces the hybrid surplus or increases the hybrid deficit, as the case may be, of the secondary affiliate,
(I) be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the primary affiliate, and
(II) be deducted from the hybrid underlying tax of the primary affiliate, and
(D) where such loss reduces the taxable surplus or increases the taxable deficit, as the case may be, of the secondary affiliate,
(I) be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the primary affiliate, and
(II) be deducted from the underlying foreign tax of the primary affiliate; and
(b) where by virtue of the primary affiliate being responsible for paying, or claiming a refund of, income or profits tax for the year on behalf of the consolidated group,
(i) an amount is paid to the primary affiliate by a secondary affiliate in respect of the income or profits tax that would have been payable by the secondary affiliate for the year had it not been a member of the group,
(A) in respect of the secondary affiliate, the amount so paid shall be deemed to be a payment of such income or profits tax for the year, and
(B) in respect of the primary affiliate,
(I) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the exempt surplus or deducted from the exempt deficit, as the case may be, of the secondary affiliate shall at the end of the year be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the primary affiliate,
(I.1) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the secondary affiliate is, at the end of the year, to be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the primary affiliate and deducted from the hybrid underlying tax of the primary affiliate, and
(II) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the taxable surplus or deducted from the taxable deficit, as the case may be, of the secondary affiliate shall at the end of the year be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the primary affiliate and be deducted from the underlying foreign tax of the primary affiliate, or
(ii) an amount is paid by the primary affiliate to a secondary affiliate in respect of a reduction or refund, because of a loss or a tax credit of the secondary affiliate for a taxation year, of the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group
(A) in respect of the primary affiliate,
(I) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the exempt surplus or included in the exempt deficit, as the case may be, of the secondary affiliate shall, at the end of the year to which the loss or the tax credit relates, be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the primary affiliate,
(I.1) such portion of the amount so paid as may reasonably be regarded as relating to an amount deducted from the hybrid surplus or included in the hybrid deficit, as the case may be, of the secondary affiliate is, at the end of the year of the loss, to be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the primary affiliate and added to the hybrid underlying tax of the primary affiliate, and
(II) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the taxable surplus or included in the taxable deficit, as the case may be, of the secondary affiliate shall, at the end of the year to which the loss or the tax credit relates, be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the primary affiliate and be added to the underlying foreign tax of the primary affiliate, and
(B) in respect of the secondary affiliate, the amount is deemed to be a refund to the secondary affiliate, for the year to which the loss or the tax credit relates, of income or profits tax in respect of the loss or the tax credit,
and, for the purposes of this paragraph, any amount paid by a particular secondary affiliate to another secondary affiliate in respect of any income or profits tax that would have been payable by the particular secondary affiliate for the year had it not been a member of the consolidated group shall be deemed to have been paid in respect of such tax by the particular secondary affiliate to the primary affiliate and to have been paid in respect of such tax by the primary affiliate to the other secondary affiliate.
(1.11) For the purposes of subsection (1.1), a non-resident corporation is deemed to be, at any time, a foreign affiliate of a particular corporation resident in Canada if at that time the non-resident corporation is a foreign affiliate of another corporation that is resident in Canada and is related (otherwise than because of a right referred to in paragraph 251(5)(b) of the Act) to the particular corporation.
(1.12) Subsection (1.13) applies in respect of a particular foreign affiliate of a corporation resident in Canada that is a secondary affiliate (within the meaning assigned by subsection (1.1)) and in respect of a foreign affiliate of the corporation that is the primary affiliate (within the meaning assigned by subsection (1.1)) in respect of the particular affiliate if
(a) the particular affiliate has an equity percentage in another foreign affiliate (in this subsection and subsection (1.13) referred to as the “transparent affiliate”);
(b) under the income tax laws of the country referred to in subsection (1.1), if the particular affiliate were not a member of a consolidated group, the particular affiliate, and not the transparent affiliate, would be liable for any tax payable to, or entitled to any refund from, a government of that country for that year in respect of the income or profits, or loss, as the case may be, for the year of the transparent affiliate; and
(c) the primary affiliate pays income or profits tax, or receives a refund, in respect of the income or profits, or loss, as the case may be, for the year of the transparent affiliate.
(1.13) If this subsection applies, then in respect of the particular foreign affiliate and the primary affiliate referred to in subsection (1.12)
(a) for the purposes of applying subparagraphs (1.1)(a)(iv) and (1.1)(b)(i), where any income or profits tax that would otherwise be payable by the particular affiliate for the year, if the particular affiliate had no other taxation year and were not a member of the consolidated group referred to in subsection (1.1), is increased because of income or profits of the transparent affiliate referred to in paragraph (1.12)(a),
(i) to the extent that the income or profits increases the net earnings included in the exempt earnings of the transparent affiliate,
(A) the amount of any such increase is deemed to have been included in the exempt surplus, or deducted from the exempt deficit, as the case may be, of the particular affiliate, and
(B) any such income or profits tax that would have been payable by the particular affiliate in respect of the income or profits is deemed to be income or profits tax that would otherwise have reduced the net earnings that are included in the exempt earnings of the particular affiliate,
(ii) to the extent that the income or profits increases the hybrid surplus or reduces the hybrid deficit of the transparent affiliate,
(A) the amount of the increase or reduction is deemed to have been included in the hybrid surplus, or deducted from the hybrid deficit, as the case may be, of the particular affiliate, and
(B) any such income or profits tax that would have been payable by the particular affiliate in respect of the income or profits is deemed to be income or profits tax that would otherwise have reduced the hybrid surplus or increased the hybrid deficit, as the case may be, of the particular affiliate, and
(iii) to the extent that the income or profits increases the net earnings included in the taxable earnings of the transparent affiliate,
(A) the amount of any such increase is deemed to have been included in the taxable surplus, or deducted from the taxable deficit, as the case may be, of the particular affiliate, and
(B) any such income or profits tax that would have been payable by the particular affiliate in respect of the income or profits is deemed to be income or profits tax that would otherwise have reduced the net earnings that are included in the taxable earnings of the particular affiliate; and
(b) for the purpose of applying subparagraphs (1.1)(a)(v) and (1.1)(b)(ii), to the extent that the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group is reduced because of a loss, for the year or a previous taxation year, of the transparent affiliate referred to in paragraph (1.12)(a), or to the extent that the primary affiliate receives, in respect of a loss of the transparent affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the primary affiliate on behalf of the consolidated group,
(i) such loss is deemed to be a loss of the particular affiliate,
(ii) to the extent that such loss reduces the exempt surplus or increases the exempt deficit of the transparent affiliate, such loss is deemed to reduce the exempt surplus or increase the exempt deficit, as the case may be, of the particular affiliate,
(iii) to the extent that such loss reduces the hybrid surplus or increases the hybrid deficit of the transparent affiliate, such loss is deemed to reduce the hybrid surplus or increase the hybrid deficit, as the case may be, of the particular affiliate, and
(iv) to the extent that such loss reduces the taxable surplus or increases the taxable deficit of the transparent affiliate, such loss is deemed to reduce the taxable surplus or increase the taxable deficit, as the case may be, of the particular affiliate.
(1.2) For the purposes of this Part, where, pursuant to the income tax law of a country other than Canada, a corporation resident in that country that is a foreign affiliate of a corporation resident in Canada (in this subsection referred to as the “taxpaying affiliate”) deducts, in computing its income or profits tax payable for a taxation year to a government of that country, a loss of another corporation resident in that country that is a foreign affiliate of the corporation resident in Canada (in this subsection referred to as the “loss affiliate”), the following rules apply:
(a) any such income or profits tax paid by the taxpaying affiliate for the year shall be deemed not to have been paid;
(b) any such income or profits tax that would have been payable by the taxpaying affiliate for the year if the taxpaying affiliate had not been allowed to deduct such loss shall be deemed to have been paid for the year;
(c) to the extent that the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year is reduced by virtue of such loss, the amount of such reduction shall at the end of the year,
(i) where such loss reduces the exempt surplus or increases the exempt deficit, as the case may be, of the loss affiliate, be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the taxpaying affiliate,
(i.1) where such loss reduces the hybrid surplus or increases the hybrid deficit, as the case may be, of the loss affiliate,
(A) be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the taxpaying affiliate, and
(B) be deducted from the hybrid underlying tax of the taxpaying affiliate, and
(ii) where such loss reduces the taxable surplus or increases the taxable deficit, as the case may be, of the loss affiliate,
(A) be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the taxpaying affiliate, and
(B) be deducted from the underlying foreign tax of the taxpaying affiliate; and
(d) where an amount is paid by the taxpaying affiliate to the loss affiliate in respect of the reduction, by virtue of such loss, of the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year,
(i) in respect of the taxpaying affiliate,
(A) such portion of the amount as may reasonably be regarded as relating to an amount deducted from the exempt surplus or included in the exempt deficit, as the case may be, of the loss affiliate shall at the end of the year be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the taxpaying affiliate,
(A.1) such portion of the amount as may reasonably be regarded as relating to an amount deducted from the hybrid surplus or included in the hybrid deficit, as the case may be, of the loss affiliate is, at the end of the year, to be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the taxpaying affiliate and added to the hybrid underlying tax of the taxpaying affiliate, and
(B) such portion of the amount as may reasonably be regarded as relating to an amount deducted from the taxable surplus or included in the taxable deficit, as the case may be, of the loss affiliate shall at the end of the year be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the taxpaying affiliate and be added to the underlying foreign tax of the taxpaying affiliate, and
(ii) in respect of the loss affiliate, the amount shall be deemed to be a refund to the loss affiliate of income or profits tax in respect of the loss for the taxation year of the loss.
(1.21) Subsection (1.22) applies if
(a) a foreign affiliate of the taxpayer (in this subsection and subsection (1.22) referred to as the “shareholder affiliate”) has an equity percentage in another foreign affiliate (in this subsection and subsection (1.22) referred to as the “transparent affiliate”); and
(b) under the income tax laws of the country in which the shareholder affiliate is resident, the shareholder affiliate, and not the transparent affiliate, is liable for any tax payable to, or entitled to any refund from, a government of that country for that year in respect of the income or profits, or loss, as the case may be, for the year of the transparent affiliate.
(1.22) If this subsection applies, for the purpose of applying subsection (1.2), any loss of the transparent affiliate, to the extent that the loss is deducted in computing the income, profits or loss of the shareholder affiliate under an income tax law referred to in paragraph (1.21)(b),
(a) is deemed to be a loss of the shareholder affiliate; and
(b) is deemed to
(i) reduce the exempt surplus, or increase the exempt deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the exempt surplus or increases the exempt deficit of the transparent affiliate,
(ii) reduce the hybrid surplus or increase the hybrid deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the hybrid surplus or increases the hybrid deficit of the transparent affiliate, and
(iii) reduce the taxable surplus or increase the taxable deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the taxable surplus or increases the taxable deficit of the transparent affiliate.
(1.3) For the purpose of paragraph (b) of the definition foreign accrual tax in subsection 95(1) of the Act and subject to subsection (1.4),
(a) if under the income tax laws of the country in which the particular affiliate or a shareholder affiliate of the particular affiliate, as the case may be, referred to in that paragraph is resident, the particular affiliate, or shareholder affiliate, and one or more other corporations, each of which is resident in that country, determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis, then any amount paid by the particular affiliate, or shareholder affiliate, to any of those other corporations to the extent that the amount paid may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate, or shareholder affiliate, in respect of a particular amount that is included under subsection 91(1) of the Act in computing the taxpayer’s income for a taxation year of the taxpayer in respect of the particular affiliate, if the tax liability of the particular affiliate, or shareholder affiliate, and those other corporations had not been determined on a consolidated or combined basis, is prescribed to be foreign accrual tax applicable to the particular amount; and
(b) if, under the income tax laws of the country in which the particular affiliate or a shareholder affiliate of the particular affiliate, as the case may be, referred to in that paragraph is resident, the particular affiliate, or shareholder affiliate, deducts, in computing its income or profits subject to tax in that country for a taxation year, an amount in respect of a loss of another corporation (referred to in this paragraph and paragraph (1.6)(a) as the “loss transferor”) resident in that country (referred to in this paragraph and paragraph (1.6)(a) as the “transferred loss”), then any amount paid by the particular affiliate, or shareholder affiliate, to the loss transferor to the extent that the amount paid may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate, or shareholder affiliate, in respect of a particular amount that is included under subsection 91(1) of the Act in computing the taxpayer’s income for a taxation year of the taxpayer in respect of the particular affiliate, if the tax liability of the particular affiliate, or shareholder affiliate, had been determined without deducting the transferred loss, is prescribed to be foreign accrual tax applicable to the particular amount.
(1.4) If the amount prescribed under paragraph (1.3)(a) or (b), or any portion of the amount, can reasonably be considered to be in respect of a particular loss (other than a capital loss) or a capital loss of another corporation for a taxation year of the other corporation, then the amount so prescribed is to be reduced to the extent that it can reasonably be considered to be in respect of the portion of the particular loss or capital loss, as the case may be, that would, if sections 5903 and 5903.1 were read without reference to their subsection (4), not be a foreign accrual property loss (within the meaning assigned by subsection 5903(3)), or a foreign accrual capital loss (within the meaning assigned by subsection 5903.1(3)), as the case may be, of a controlled foreign affiliate of a person or partnership that is, at the end of that taxation year, a relevant person or partnership (within the meaning assigned by subsection 5903(6)) in respect of the taxpayer.
(1.5) If subsection (1.4) applied to reduce an amount that would, in the absence of subsection (1.4), be prescribed by subsection (1.3) to be foreign accrual tax applicable to an amount (referred to in this subsection as the “FAPI amount”) included under subsection 91(1) of the Act in computing the taxpayer’s income for a taxation year (referred to in subsection (1.6) as the “FAPI year”) of the taxpayer in respect of the particular affiliate referred to in paragraph (1.3)(a) or (b), then an amount equal to that reduction is, for the purposes of paragraph (b) of the definition foreign accrual tax in subsection 95(1) of the Act, prescribed to be foreign accrual tax applicable to the FAPI amount in the taxpayer’s taxation year that includes the last day of the designated taxation year, if any, of the particular affiliate or the shareholder affiliate referred to in paragraph (1.3)(a) or (b), as the case may be.
(1.6) For the purposes of subsection (1.5), the designated taxation year of the particular affiliate or the shareholder affiliate, as the case may be, is a particular taxation year of the particular affiliate, or the shareholder affiliate, if
(a) in the particular year, or in the taxation year of the particular affiliate or shareholder affiliate (referred to in this paragraph as the “PATY”) ending in the FAPI year and one or more taxation years of the particular affiliate (or shareholder affiliate) each of which follows the PATY and the latest of which is the particular year, all losses of the particular affiliate (or shareholder affiliate) and the other corporations referred to in paragraph (1.3)(a) — or of the particular affiliate, the loss transferor and each corporation that would have been permitted to deduct the transferred loss against its income under the income tax laws referred to in paragraph (1.3)(b) if the transferred loss had not been deducted by the particular affiliate and if the corporation had taxable income for its taxation years ending in the FAPI year in excess of the transferred loss — for their taxation years ending in the FAPI year would, on the assumption that the particular affiliate (or shareholder affiliate) and each of those other corporations had no foreign accrual property income for any taxation year, reasonably be considered to have been fully deducted (under the tax laws referred to in paragraph (1.3)(a) or (b)) against income (as determined under those tax laws) of the particular affiliate (or shareholder affiliate) or those other corporations;
(b) the taxpayer demonstrates that no other losses of the particular affiliate (or shareholder affiliate) or those other corporations for any taxation year were, or could reasonably have been, deducted under those tax laws against that income; and
(c) the last day of the particular year occurs in one of the five taxation years of the taxpayer that immediately follow the FAPI year.
(1.7) If the amount prescribed under paragraph (1.3)(a) or (b), or any portion of the amount, can reasonably be considered to be in respect of a capital loss of another corporation for a taxation year of the other corporation, then the amount so prescribed, as reduced by subsection (1.4), if applicable, shall be reduced to the extent that it can reasonably be considered to be in respect of the portion of that capital loss that would not be deductible by the particular affiliate in computing its foreign accrual property income for the year if the capital loss had been incurred by the particular affiliate.
(2) In computing the earnings of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business carried on by it in a country, there shall be added to the amount thereof determined under subparagraph (a)(i) or (ii) of the definition earnings in subsection (1) (in this subsection referred to as the “earnings amount”) such portion of the following amounts as was deducted or was not included, as the case may be, in computing the earnings amount,
(a) any income or profits tax paid to the government of a country by the affiliate so deducted,
(b) if established by the taxpayer, the amount by which any amount so deducted in respect of an expenditure made by the affiliate exceeds the amount, if any, by which
(i) the amount of the expenditure
exceeds
(ii) the aggregate of all other deductions in respect of that expenditure made by the affiliate in computing the earnings amounts for preceding taxation years,
(c) any loss of the affiliate referred to in the description of D in the definition foreign accrual property income in subsection 95(1) of the Act so deducted,
(d) any capital loss of the affiliate in respect of the disposition of capital property so deducted (for greater certainty, capital property of the affiliate for the purposes of this paragraph includes all the property of the affiliate other than property referred to in subparagraph 39(1)(b)(i) or (ii) of the Act on the assumption for this purpose that the affiliate is a corporation resident in Canada),
(e) any loss of the affiliate for a preceding or a subsequent taxation year so deducted,
(f) any revenue, income or profit (other than an amount referred to in paragraph (f.1), (h) or (i)) of the affiliate derived in the year from such business carried on in that country to the extent that such revenue, income or profit
(i) is not otherwise required to be included in computing the earnings amount of the affiliate for any taxation year by the income tax law that is relevant in computing that amount, and
(ii) subject to subsections (2.01) and (2.011), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies), of property by the affiliate,
(A) to a person or partnership that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer, and
(B) to which a tax deferral, rollover or similar tax postponement provision of the income tax laws that are relevant in computing the earnings amount of the affiliate applied, and
(f.1) any assistance from a government, municipality or other public authority (other than any such assistance that reduced the amount of an expenditure for purposes of computing the earnings amount for any taxation year) that the affiliate received or became entitled to receive in the year in connection with such business carried on in that country that is not otherwise required to be included in computing the earnings amount for the year or for any other taxation year,
and there shall be deducted such portion of the following amounts as were included or were not deducted, as the case may be, in computing the earnings amount,
(g) any income or profits tax refunded by the government of a country to the affiliate so included;
(h) any capital gain of the affiliate in respect of the disposition of capital property so included (for greater certainty, capital property of the affiliate for the purposes of this paragraph includes all the property of the affiliate other than property referred to in any of subparagraphs 39(1)(a)(i) to (iv) of the Act on the assumption for this purpose that the affiliate is a corporation resident in Canada);
(i) any amount that is included in the foreign accrual property income of the affiliate so included;
(j) any loss, outlay or expense made or incurred in the year by the affiliate for the purpose of gaining or producing such earnings amount to the extent that
(i) such loss, outlay or expense is not otherwise permitted to be deducted in computing the earnings amount of the affiliate for any taxation year by the income tax law that is relevant in computing that amount, or
(ii) such outlay or expense can reasonably be regarded as applicable to any revenue added to the earnings amount of the affiliate under paragraph (f),
where such loss, outlay or expense
(iii) subject to subsections (2.01) and (2.011), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies), of property by the affiliate,
(A) to a person or partnership that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer, and
(B) to which a loss deferral or similar loss postponement provision of the income tax laws that are relevant in computing the earnings amount of the affiliate applied, and
(iv) is not
(A) a loss referred to in paragraph (c) or (d),
(B) a capital expenditure other than interest, or
(C) income or profits tax paid to the government of a country;
(k) any outlay made in the year in repayment of an amount referred to in paragraph (f.1); and
(l) if any property of the affiliate that was acquired from a person or partnership that was, at the time of the acquisition, a designated person or partnership in respect of the taxpayer has been disposed of, the amount in respect of that property that may reasonably be considered as having been included under paragraph (f) in computing the earnings amount of any foreign affiliate of the taxpayer or of a person or partnership that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer.
(2.01) Subparagraphs (2)(f)(ii) and (j)(iii) and subsection (5.1) do not apply to a particular disposition of property (referred to in this subsection as the “affiliate property”) by a particular foreign affiliate of a taxpayer if
(a) the only consideration received in respect of the particular disposition is shares of the capital stock of another foreign affiliate of the taxpayer;
(b) all of the shares of the capital stock of the other affiliate that are, immediately after the particular disposition, owned by the particular affiliate are disposed of, at a particular time that is within 90 days of the day that includes the time of the particular disposition, to a person or partnership that at the particular time is not a designated person or partnership in respect of the taxpayer; and
(c) the affiliate property is not disposed of by the other affiliate as part of a series of transactions or events that includes the particular disposition.
(2.011) Subparagraphs (2)(f)(ii) and (j)(iii) and subsection (5.1) do not apply to a particular disposition of property (referred to in this subsection as the “affiliate property”) by a particular foreign affiliate of a taxpayer to another foreign affiliate of the taxpayer if
(a) the particular disposition is a disposition referred to in subparagraph 15(1.5)(c)(i) of the Act;
(b) all of the shares of the capital stock of the other affiliate are owned, at a particular time that is within 180 days after the day that includes the time of the particular disposition, by a person or partnership that at the particular time is not a designated person or partnership in respect of the taxpayer; and
(c) the affiliate property is not disposed of by the other affiliate as part of a series of transactions or events that includes the particular disposition.
(2.02) If an amount or a portion of an amount would, in the absence of this subsection, be included in computing the exempt earnings, or deducted in computing the exempt loss, of a foreign affiliate of a corporation in respect of the corporation for a taxation year of the affiliate and the amount or portion arises from a disposition of property (other than money), at any time, to a person or partnership that was, at that time, a designated person or partnership in respect of the corporation where that disposition is a transaction (within the meaning of subsection 245(1) of the Act) that is, or would be (if the amount or portion were a tax benefit for the purposes of section 245 of the Act), an avoidance transaction (within the meaning of subsection 245(3) of the Act), the following rules apply:
(a) the amount or portion is instead to be included in the affiliate’s taxable earnings for the year in respect of the corporation; and
(b) any income or profits tax relating to the transaction that would otherwise be deducted in computing the exempt earnings, or included in computing the exempt loss, of the affiliate for the year in respect of the corporation, is instead to be deducted from the affiliate’s taxable earnings for the year in respect of the corporation.
(2.03) The determination — under subparagraph (a)(iii) and paragraph (b) of the definition earnings, and paragraph (b) of the definition loss, in subsection (1) — of the earnings or loss of a foreign affiliate of a taxpayer resident in Canada for a particular taxation year from an active business is to be made as if the affiliate
(a) had, in computing its income or loss from the business for each taxation year (referred to in this paragraph as an “earnings or loss year”) that is the particular year or is any preceding taxation year that ends after August 19, 2011,
(i) claimed all deductions that it could have claimed under the Act, up to the maximum amount deductible in computing the income or loss from the business for that earnings or loss year, and
(ii) made all claims and elections and taken all steps under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, to maximize the amount of any deduction referred to subparagraph (i); and
(b) had, in computing its income or loss from the business for any preceding taxation year that ended on or before August 19, 2011, claimed all deductions, if any, that it actually claimed under the Act, up to the maximum amount deductible, and made all claims and elections, if any, and taken all steps, if any, under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, that it actually made.
(2.1) In computing the earnings of a foreign affiliate of a corporation resident in Canada for a taxation year of the affiliate from an active business carried on by it in Canada or in a designated treaty country, where the affiliate is resident in a designated treaty country and the corporation, together with all other corporations resident in Canada with which the corporation does not deal at arm’s length and in respect of which the affiliate is a foreign affiliate, have so elected in respect of the business for the taxation year or any preceding taxation year of the affiliate, the following rules apply:
(a) there shall be added to the amount determined under subparagraph (a)(i) of the definition earnings in subsection (1) after adjustment in accordance with the provisions of subsection (2) (in this subsection and in subsection (2.2) referred to as the “adjusted earnings amount”) the total of all amounts each of which is the amount, if any, by which
(i) the amount that can reasonably be regarded as having been deducted in respect of the cost of a capital property or foreign resource property of the affiliate in computing the adjusted earnings amount
exceeds
(ii) the amount that may reasonably be regarded as having been deducted in respect of the cost of that capital property or foreign resource property in computing income or profit of the affiliate for the year from that business in its financial statements prepared in accordance with the laws of the country in which the affiliate is resident;
(b) there shall be deducted from the adjusted earnings amount the aggregate of all amounts each of which is the amount, if any, by which
(i) the amount determined under subparagraph (a)(ii) in respect of that capital property or foreign resource property
exceeds
(ii) the amount determined under subparagraph (a)(i) in respect of that capital property or foreign resource property;
(c) where any capital property or foreign resource property of the affiliate has been disposed of in the taxation year,
(i) there shall be added to the adjusted earnings amount the aggregate of the amounts deducted pursuant to paragraphs (b) and (2.2)(b) for preceding taxation years of the affiliate in respect of that capital property or foreign resource property, and
(ii) there shall be deducted from the adjusted earnings amount the aggregate of the amounts added pursuant to paragraphs (a) and (2.2)(a) for the preceding taxation years of the affiliate in respect of that capital property or foreign resource property; and
(d) for the purposes of paragraph (c), where the affiliate has merged with one or more corporations to form a new corporation, any capital property or foreign resource property of the affiliate that becomes a property of the new corporation shall be deemed to have been disposed of by the affiliate in its last taxation year before the merger.
(2.2) Where the taxation year of a foreign affiliate of a particular corporation resident in Canada for which the particular corporation has made an election under subsection (2.1) in respect of an active business carried on by the affiliate is not the first taxation year of the affiliate in which it carried on the business and in which it was a foreign affiliate of the particular corporation or of another corporation resident in Canada with which the particular corporation was not dealing at arm’s length at any time (hereinafter referred to as the “non-arm’s length corporation”), in computing the earnings of the affiliate from the business for the taxation year for which the election is made, the following rules, in addition to those set out in subsection (2.1), apply:
(a) there shall be added to the adjusted earnings amount the aggregate of all amounts each of which is an amount that would have been determined under paragraph (2.1)(a) or subparagraph (2.1)(c)(i)
(i) for any preceding taxation year of the affiliate in which it was a foreign affiliate of the particular corporation if the particular corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the particular corporation and carried on the business, and
(ii) for any preceding taxation year of the affiliate (other than a taxation year referred to in subparagraph (i)) in which it was a foreign affiliate of the non-arm’s length corporation if the non-arm’s length corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the non-arm’s length corporation and carried on the business; and
(b) there shall be deducted from the adjusted earnings amount the aggregate of all amounts each of which is an amount that would have been determined under paragraph (2.1)(b) or subparagraph (2.1)(c)(ii)
(i) for any preceding taxation year of the affiliate in which it was a foreign affiliate of the particular corporation if the particular corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the particular corporation and carried on the business, and
(ii) for any preceding taxation year of the affiliate (other than a taxation year referred to in subparagraph (i)) in which it was a foreign affiliate of the non-arm’s length corporation if the non-arm’s length corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the non-arm’s length corporation and carried on the business.
(2.3) For the purposes of this subsection and subsections (2.1) and (2.2), where an election under subsection (2.1) has been made by a corporation resident in Canada (in this subsection and in subsection (2.4) referred to as the “electing corporation”) in respect of an active business of a foreign affiliate of the electing corporation and the affiliate subsequently becomes a foreign affiliate of another corporation resident in Canada (in this subsection and in subsection (2.4) referred to as the “subsequent corporation”) that does not deal at arm’s length with the electing corporation, in computing the earnings of the affiliate from such business in respect of the subsequent corporation for any taxation year of the affiliate ending after the affiliate so became a foreign affiliate of the subsequent corporation, the subsequent corporation shall be deemed to have made an election under subsection (2.1) in respect of the business of the affiliate for the first such taxation year and for the purposes of paragraph (2.1)(d), the earnings of the affiliate for all of the preceding taxation years shall be deemed to have been adjusted in accordance with subsections (2.1) and (2.2) in the same manner as if the subsequent corporation had been the electing corporation.
(2.4) For the purposes of subsection (2.3)
(a) a corporation formed as a result of a merger, to which section 87 of the Act applies, of the electing corporation and one or more other corporations, or
(b) a corporation that has acquired shares of the capital stock of a foreign affiliate, in respect of which an election under subsection (2.1) has been made, from the electing corporation in a transaction in respect of which an election under section 85 of the Act was made
shall be deemed to be a subsequent corporation that does not deal at arm’s length with the electing corporation.
(2.5) [Repealed, SOR/97-505, s. 8]
(2.6) A corporation resident in Canada, and all other corporations resident in Canada with which the corporation does not deal at arm’s length, shall each be considered to have elected under subsection (2.1) in respect of an active business carried on by a non-resident corporation that is a foreign affiliate of each such corporation for a taxation year if there is filed with the Minister on or before the day that is the later of
(a) June 30, 1986, and
(b) the earliest of the days on or before which any one of the said corporations is required to file a return of income pursuant to section 150 of the Act for its taxation year following the taxation year in which the taxation year of the affiliate in respect of which the election is made ends,
the following information:
(c) a description of the active business sufficient to identify the business; and
(d) a statement on behalf of each such corporation, signed by an authorized official of the corporation on behalf of which the statement is made, that the corporation is electing under subsection (2.1) in respect of the business.
(2.7) Notwithstanding any other provision of this Part, if an amount (referred to in this subsection as the “inclusion amount”) is included in computing the income or loss from an active business of a foreign affiliate of a taxpayer for a taxation year under subparagraph 95(2)(a)(i) or (ii) of the Act and the inclusion amount is in respect of a particular amount paid or payable,
(a) if clause 95(2)(a)(ii)(D) of the Act is applicable, by the second affiliate referred to in that clause,
(i) the particular amount is to be deducted in computing the second affiliate’s income or loss from an active business carried on by it in the country in which it is resident for its earliest taxation year in which that amount was paid or payable,
(ii) the second affiliate is deemed to have carried on an active business in that country for that earliest taxation year, and
(iii) in computing the second affiliate’s income or loss for a taxation year from any source, no amount is to be deducted in respect of the particular amount except as required under subparagraph (i); and
(b) in any other case, by the other foreign affiliate referred to in subparagraph 95(2)(a)(i) or (ii) of the Act, as the case may be, or by a partnership of which the other foreign affiliate is a member, the particular amount is, except where it has been deducted under paragraph (2)(j) in computing the other foreign affiliate’s earnings or loss from an active business,
(i) to be deducted in computing the earnings or loss of the other foreign affiliate or the partnership, as the case may be, from the active business for its earliest taxation year in which the particular amount was paid or payable, and
(ii) not to be deducted in computing its earnings or loss from the active business for any other taxation year.
(2.8) [Repealed, 2013, c. 34, s. 46]
(2.9) If paragraph 95(2)(k.1) of the Act applies in respect of a particular taxation year of a foreign affiliate of a taxpayer or in respect of a particular fiscal period of a partnership (which foreign affiliate or partnership is referred to in this subsection as the “operator” and which particular taxation year or particular fiscal period is referred to in this subsection as the “specified taxation year”) a member of which is, at the end of the period, a foreign affiliate of a taxpayer,
(a) in computing the affiliate’s earnings or loss from the foreign business referred to in that paragraph for the affiliate’s taxation year (referred to in subparagraphs (i) and (ii) as the “preceding taxation year”) that includes the day that is immediately before the beginning of the specified taxation year,
(i) there is to be added to the amount determined under paragraph (a) of the definition earnings in subsection (1), after adjustment in accordance with subsections (2) to (2.2),
(A) where the operator is the affiliate, the total of
(I) the amount, if any, by which the total determined under sub-subclause (ii)(A)(I)2 in respect of the operator for the preceding taxation year exceeds the total determined under sub-subclause (ii)(A)(I)1 in respect of the operator for that year, and
(II) if the operator was deemed under paragraph 95(2)(k.1) of the Act to have, at the end of the preceding taxation year, disposed of property owned by it that was used or held by it in the course of carrying on the foreign business in that year, the amount that is the total of all amounts each of which is determined by the formula
(A – B) – C
where
- A
- is the fair market value, immediately before the end of that year, of a property deemed because of that paragraph to have been disposed of,
- B
- is the amount determined under paragraph (a) of the definition relevant cost base in subsection 95(4) of the Act in respect of the property, in respect of the taxpayer, immediately before the time of the disposition, and
- C
- is the amount, if any, of the capital gain determined in respect of the disposition of the property at that time, and
(B) where the operator is the partnership, the amount determined under subsection 5908(13); and
(ii) there is to be added to the amount determined under paragraph (a) of the definition loss in subsection (1),
(A) where the operator is the affiliate, the total of
(I) the amount, if any, by which
1 the total of all amounts each of which is an amount deemed under paragraph 95(2)(k.1) of the Act to have been claimed under any of paragraphs 20(1)(l), (l.1) and (7)(c), and subparagraphs 138(3)(a)(i), (ii) and (iv), of the Act (each of which provisions is referred to in this subparagraph as a “reserve provision”) in computing the income from the foreign business for the preceding taxation year
exceeds
2 the total of all amounts each of which is an amount actually claimed by the operator as a reserve in computing its income from the foreign business for that year that can reasonably be considered to be in respect of amounts in respect of which a reserve could have been claimed under a reserve provision on the assumption that the operator could have claimed amounts in respect of the reserve provisions for that year, and
(II) the total of all amounts each of which is the amount, if any, by which the amount determined under the description of B in the formula in subclause (i)(A)(II) in respect of a property described in that subclause exceeds the amount determined under the description of A in the formula in that clause in respect of the property, and
(B) where the operator is the partnership, the amount determined under subsection 5908(13); and
(b) any property of the operator that is, under that paragraph, deemed to have been disposed of and reacquired by the operator is, for the purposes of this section, deemed to have been disposed of and reacquired by the operator in the same manner and for the same amounts as if that paragraph applied for the purposes of this section.
(3) For the purposes of this Part, any corporation that was, on January 1, 1972, a foreign affiliate of a taxpayer shall be deemed to have become a foreign affiliate of the taxpayer on that day.
(4) For the purposes of this Part, government of a country includes the government of a state, province or other political subdivision of that country.
(5) For the purposes of this section, each capital gain, capital loss, taxable capital gain or allowable capital loss of a foreign affiliate of a taxpayer from the disposition of property is to be computed in accordance with the rules set out in subsection 95(2) of the Act.
(5.01) For the purposes of subsection (6), if any capital gain, capital loss, taxable capital gain or allowable capital loss referred to in subsection (5), or any capital loss referred to in subparagraph (iii) of the description of B in the definition hybrid surplus in subsection (1), of a foreign affiliate of a corporation is required to be computed in Canadian currency and the currency referred to in subsection (6) is not Canadian currency, the amount of the gain or loss is to be converted from Canadian currency into the currency referred to in subsection (6) at the rate of exchange prevailing on the date of disposition of the property.
(5.1) Notwithstanding subsection (5), if, under the income tax laws of a country other than Canada that are relevant in computing the earnings of a foreign affiliate of a taxpayer resident in Canada from an active business carried on by it in a country, no gain or loss is recognized in respect of a disposition (other than a disposition to which subsection (9) applies) by the affiliate of a capital property used or held principally for the purpose of gaining or producing income from an active business to a person or partnership (in this subsection referred to as the “transferee”) that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer, for the purposes of this section,
(a) the affiliate’s proceeds of disposition of the property shall be deemed to be an amount equal to the aggregate of the adjusted cost base to the affiliate of the property immediately before the disposition and any outlays and expenses to the extent they were made or incurred by the affiliate for the purpose of making the disposition;
(b) the cost to the transferee of the property acquired from the affiliate shall be deemed to be an amount equal to the affiliate’s proceeds of disposition, as determined under paragraph (a); and
(c) the transferee shall be deemed to have acquired the property on the date that it was acquired by the affiliate.
(6) All amounts referred to in subsections (1) and (2) shall be maintained on a consistent basis from year to year in the currency of the country in which the foreign affiliate of the corporation resident in Canada is resident or any currency that the corporation resident in Canada demonstrates to be reasonable in the circumstances.
(7) For the purposes of this Part, the amount of any stock dividend paid by a foreign affiliate of a corporation resident in Canada on a share of a class of its capital stock shall be deemed to be nil.
(7.1) [Repealed, 2013, c. 34, s. 85]
(8) For the purposes of computing the various amounts referred to in this section,
(a) the first taxation year of a foreign affiliate, of a corporation resident in Canada, that is formed as a result of a foreign merger (within the meaning assigned by subsection 87(8.1) of the Act) is deemed to have commenced at the time of the merger, and a taxation year of a predecessor corporation (within the meaning assigned by subsection 5905(3)) that would otherwise have ended after that time is deemed to have ended immediately before that time; and
(b) if subsection 91(1.2) of the Act applies at any particular time in respect of a foreign affiliate of a corporation, the various amounts are to be computed, in respect of attributed amounts for the stub period in respect of the particular time, as if
(i) the affiliate’s taxation year that would have included the particular time ended at the stub-period end time in respect of the particular time, and
(ii) all transactions or events, giving rise to attributed amounts, that occurred at the particular time, occurred at the stub-period end time in respect of the particular time.
(8.1) The following definitions apply in paragraph 5907(8)(b).
- attributed amounts
attributed amounts, for a stub period, in respect of a particular time referred to in paragraph (8)(b), of a foreign affiliate of a corporation, means
(a) the amounts of any income, gain or loss of the affiliate for the stub period that are relevant in determining amounts that are to be included or may be deducted under section 91 of the Act in respect of the affiliate for the particular stub period, in computing the income of the corporation;
(b) any portion of the affiliate’s capital gain or capital loss – from a disposition, in the stub period or at the particular time referred to in paragraph (8)(b), of a property that is not an excluded property – that is not described in paragraph (a); and
(c) any income or profits tax paid to the government of a country, in respect of amounts described in paragraph (a) or (b). (sommes attribuées)
- stub period
stub period, in respect of a particular time at which subsection 91(1.2) of the Act applies in respect of a foreign affiliate of a corporation, means a period that ends at the stub-period end time in respect of the particular time and begins immediately after the later of
(a) the last time, if any, before the particular time that subsection 91(1.2) applied in respect of the affiliate, and
(b) the end of the affiliate’s last taxation year before the particular time. (période tampon)
- stub-period end time
stub-period end time, in respect of a particular time at which subsection 91(1.2) of the Act applies in respect of a foreign affiliate of a corporation, means the time that is immediately before the particular time. (fin de la période tampon)
(9) If a foreign affiliate of a taxpayer has been liquidated and dissolved (otherwise than as a result of a foreign merger within the meaning assigned by subsection 87(8.1) of the Act), for the purposes of computing the various amounts referred to in this section, the following rules apply:
(a) where, at a particular time, property having a fair market value equal to or greater than 90 percent of the fair market value of all of the property that was owned by the affiliate immediately before the commencement of the liquidation and dissolution has been disposed of by the affiliate in the course of the liquidation and dissolution, the taxation year of the affiliate that otherwise would have included the particular time is deemed to have ended immediately before that time; and
(b) each property of the affiliate that was disposed of by the affiliate in the course of the liquidation and dissolution is deemed to have been
(i) disposed of by the affiliate, at the time that is the earlier of the time it was actually disposed of and the time that is immediately before the time that is immediately before the particular time, for proceeds of disposition equal to
(A) if the liquidation and dissolution is one to which subsection 88(3) of the Act applies in respect of the disposition, the amount that would, in the absence of subsection 88(3.3) of the Act, be determined under paragraph 88(3)(a) or (b) of the Act, as the case may be,
(B) if the liquidation and dissolution is one to which paragraph 95(2)(e) of the Act applies in respect of the disposition, the amount determined under subparagraph 95(2)(e)(i) or (ii) of the Act, as the case may be, and
(C) in any other case, the fair market value of the property at the time it was actually disposed of, and
(ii) acquired by the person or partnership to which the affiliate disposed of the property, at the time it was actually acquired, at a cost equal to the affiliate’s proceeds of disposition of the property.
(9.1) Notwithstanding any other provision of this Part, in determining the earnings or loss of a foreign affiliate of a taxpayer resident in Canada, for a taxation year of the affiliate from an active business carried on by it in a country,
(a) from a disposition of property to which paragraph 95(2)(d.1) of the Act applies, those earnings or that loss are to be determined using the rules in that paragraph; and
(b) from a disposition of property acquired in a transaction to which paragraph 95(2)(d.1) of the Act applies, the cost to the affiliate of the property is to be determined using the rules in that paragraph.
(10) Where
(a) the net earnings or net loss for a taxation year of a foreign affiliate of a corporation resident in Canada from an active business carried on in a country other than Canada would otherwise be included in the affiliate’s taxable earnings or taxable loss, as the case may be, for the year,
(b) the rate of the income or profits tax to which any earnings of that active business of the affiliate are subjected by the government of that country is, by virtue of a special exemption from or reduction of tax (other than an export incentive) that is provided under a law of such country to promote investments or projects in pursuance of a program of economic development, less than the rate of such tax that would, but for such exemption or reduction, be paid by the affiliate, and
(c) the affiliate qualified for such exemption from or reduction of tax in respect of an investment made by it in that country before January 1, 1976 or in respect of an investment made by it or a project undertaken by it in that country pursuant to an agreement in writing entered into before January 1, 1976,
for the purposes of this Part, such net earnings or net loss shall be included in the affiliate’s exempt earnings or exempt loss, as the case may be, for the year and not in the affiliate’s taxable earnings or taxable loss, as the case may be, for the year.
(11) For the purposes of this Part, a sovereign state or other jurisdiction is a designated treaty country for a taxation year of a foreign affiliate of a corporation if Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income, or a comprehensive tax information exchange agreement, in respect of that sovereign state or jurisdiction, that has entered into force and has effect for that taxation year, but any territory, possession, department, depend- ency or area of that sovereign state or jurisdiction to which that agreement or convention does not apply is not considered to be part of that sovereign state or jurisdiction for the purpose of determining whether it is a designated treaty country.
(11.1) For the purpose of subsection (11), where a comprehensive agreement or convention between Canada and another country for the elimination of double taxation on income has entered into force, that convention or agreement is deemed to have entered into force and have effect in respect of a taxation year of a foreign affiliate of a corporation any day of which is in the period that begins on the day on which the agreement or convention was signed and that ends on the last day of the last taxation year of the affiliate for which the agreement or convention is effective.
(11.11) For the purpose of applying subsection (11) in respect of a foreign affiliate of a corporation, where a comprehensive tax information exchange agreement enters into force on a particular day, the agreement is deemed to enter into force and to come into effect on the first day of the foreign affiliate’s taxation year that includes the particular day.
(11.2) For the purposes of this Part, a foreign affiliate of a corporation is, at any time, deemed not to be resident in a country with which Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income unless
(a) the affiliate is, at that time, a resident of that country for the purpose of the agreement or convention;
(b) the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention if the affiliate were treated, for the purpose of income taxation in that country, as a body corporate;
(c) where the agreement or convention entered into force before 1995, the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention but for a provision in the agreement or convention that has not been amended after 1994 and that provides that the agreement or convention does not apply to the affiliate; or
(d) the affiliate would, at that time, be a resident of that country, as provided by paragraph (a), (b) or (c) if the agreement or convention had entered into force.
(12) [Repealed, 2013, c. 34, s. 46]
(13) For the purposes of subparagraph (ii) of paragraph 128.1(1)(d) of the Act, the prescribed amount is the amount determined by the formula
X + Y
where
- X
- is the amount, if any, by which
(a) the amount, if any, determined by the formula
A – B – (C – D) + (E – F)
where
- A
- is the taxable surplus of the foreign affiliate of the other taxpayer referred to in that paragraph, in respect of the other taxpayer, at the end of the year referred to in that subparagraph,
- B
- is the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income for the year to the extent those net earnings have been included in the amount referred to in the description of A,
- C
- is the total of all amounts each of which is the amount by which the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year would have increased because of the gain or income of the affiliate that would have arisen if a disposition, deemed under paragraph 128.1(1)(b) of the Act, of a property by the affiliate had been an actual disposition of the property by the affiliate,
- D
- is the total of all amounts each of which is the amount otherwise added in computing the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year in respect of income or profits taxes paid to the government of a country in respect of all or a portion of a gain or an income of the affiliate referred to in the description of C,
- E
- is the total of all amounts each of which is the amount by which the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year would have decreased because of the loss of the affiliate that would have arisen if a disposition, deemed under paragraph 128.1(1)(b) of the Act, of a property by the affiliate had been an actual disposition of the property by the affiliate, and
- F
- is the total of all amounts each of which is the amount otherwise deducted in computing the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year in respect of income or profits taxes refunded by the government of a country in respect of all or a portion of a loss of the affiliate referred to in the description of E
exceeds
(b) the amount, if any, determined by the formula
[(G – H) × (J – 1)] + K
where
- G
- is the amount determined by the formula
L + M – N
where
- L
- is the underlying foreign tax of the affiliate in respect of the other taxpayer at the end of the year,
- M
- is the amount, if any, by which the amount determined under the description of C in paragraph (a) exceeds the amount determined under the description of D in that paragraph, and
- N
- is the amount, if any, by which the amount determined under the description of E in paragraph (a) exceeds the amount determined under the description of F in that paragraph,
- H
- is the portion of the value of L that can reasonably be considered to relate to the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income,
- J
- is the other taxpayer’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act) for its taxation year that includes the time that is immediately before the particular time, and
- K
- is the amount, if any, by which
(i) the total of all amounts required by paragraph 92(1)(a) of the Act to be added at any time in a preceding taxation year in computing the adjusted cost base to the other taxpayer of the shares of the affiliate owned by the other taxpayer at the end of the year
exceeds
(ii) the total of all amounts required by paragraph 92(1)(b) of the Act to be deducted at any time in a preceding taxation year in computing the adjusted cost base to the other taxpayer of the shares of the affiliate owned by the other taxpayer at the end of the year, and
- Y
- is the amount, if any, by which
(a) the amount, if any, determined by the formula
P – (Q – R) + (S – T)
where
- P
- is the affiliate’s hybrid surplus in respect of the other taxpayer at the end of the year,
- Q
- is the total of all amounts each of which is the amount by which the affiliate’s hybrid underlying tax in respect of the other taxpayer at the end of the year would have increased because of the capital gain of the affiliate that would have arisen if a disposition, deemed under paragraph 128.1(1)(b) of the Act, of a property by the affiliate had been an actual disposition of the property by the affiliate,
- R
- is the total of all amounts each of which is the amount otherwise added in computing the affiliate’s hybrid underlying tax in respect of the other taxpayer at the end of the year in respect of income or profits taxes paid to the government of a country in respect of all or a portion of a capital gain of the affiliate referred to in the description of Q,
- S
- is the total of all amounts each of which is the amount by which the affiliate’s hybrid underlying tax in respect of the other taxpayer at the end of the year would have decreased because of the capital loss of the affiliate that would have arisen if a disposition, deemed under paragraph 128.1(1)(b) of the Act, of a property by the affiliate had been an actual disposition of the property by the affiliate, and
- T
- is the total of all amounts each of which is the amount otherwise deducted in computing the affiliate’s hybrid underlying tax in respect of the other taxpayer at the end of the year in respect of income or profits taxes refunded by the government of a country in respect of all or a portion of a capital loss of the affiliate referred to in the description of S;
exceeds
(b) the amount, if any, determined by the formula
[U × (V – 0.5)] + (W × 0.5)
where
- U
- is the amount determined by the formula
U.1 + U.2 – U.3
where
- U.1
- is the hybrid underlying tax of the affiliate in respect of the other taxpayer at the end of the year,
- U.2
- is the amount, if any, by which the amount determined under the description of Q in paragraph (a) exceeds the amount determined under the description of R in that paragraph, and
- U.3
- is the amount, if any, by which the amount determined under the description of S in paragraph (a) exceeds the amount determined under the description of T in that paragraph,
- V
- is the other taxpayer’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act) for its taxation year that includes the time that is immediately before the particular time, and
- W
- is the amount determined under paragraph (a).
(14) For the purposes of the description of C in paragraph (a) of the description of X in subsection (13) and the description of Q in paragraph (a) of the description of Y in subsection (13), the amount by which the underlying foreign tax or the hybrid underlying tax, as the case may be, of the affiliate in respect of the other taxpayer at the end of the year would have increased if a disposition (referred to in this subsection as the “notional actual disposition”) deemed under paragraph 128.1(1)(b) of the Act of any property by the affiliate had been an actual disposition of the property by the affiliate is the total of all amounts each of which is the amount, if any, by which
(a) the amount (determined on the assumption that the notional actual disposition occurred at the time of the deemed disposition) that can reasonably be considered to be the amount of income or profits tax that the affiliate would, because of the notional actual disposition, have had to pay to the government of a particular country (other than Canada), in addition to any other income or profits tax otherwise payable to that government, in relation to the gain or income of the affiliate from the notional actual disposition
exceeds
(b) the amount that can reasonably be considered to be the portion of the notional income or profits tax payable by the affiliate to the government of the particular country in relation to the gain or income of the affiliate from the notional actual disposition (determined on the assumptions that the notional actual disposition occurred immediately after the time that is immediately after the time of the deemed disposition and that the notional income or profits tax payable by the affiliate to the government of the particular country in relation to the notional actual disposition is equal to the amount determined under paragraph (a)) that, because of a comprehensive agreement or convention for the elimination of double taxation on income between the government of the particular country and the government of any other country, would not have been payable to the government of the particular country.
(15) For the purposes of the description of E in paragraph (a) of the description of X in subsection (13) and the description of S in paragraph (a) of the description of Y in subsection (13), the amount by which the underlying foreign tax or the hybrid underlying tax, as the case may be, of the affiliate in respect of the other taxpayer at the end of the year would have decreased if a disposition (referred to in this subsection as the “notional actual disposition”) deemed under paragraph 128.1(1)(b) of the Act of any property by the affiliate had been an actual disposition of the property by the affiliate is the total of all amounts each of which the amount, if any, by which
(a) the amount (determined on the assumption that the notional actual disposition occurred at the time of the deemed disposition) that can reasonably be considered to be the amount of income or profits tax that the affiliate would, because of the notional actual disposition, have had refunded to it by the government of a particular country (other than Canada), in addition to any other income or profits tax otherwise refundable by that government, in relation to the loss or capital loss, as the case may be, of the affiliate from the notional actual disposition
exceeds
(b) the amount that can reasonably be considered to be the portion of the notional income or profits tax refundable to the affiliate by the government of the particular country in relation to the loss or capital loss, as the case may be, of the affiliate from the notional actual disposition (determined on the assumptions that the notional actual disposition occurred immediately after the time that is immediately after the time of the deemed disposition and that the notional income or profits tax refundable to the affiliate by the government of the particular country in relation to the notional actual disposition is equal to the amount determined by paragraph (a)) that, because of a comprehensive agreement or convention for the elimination of double taxation on income between the government of the particular country and the government of any other country, would not have been refundable by the government of the particular country.
- [NOTE: Application provisions are not included in the consolidated text
- see relevant amending Acts and regulations.]
- SOR/78-211, s. 1
- SOR/78-913, s. 2
- SOR/80-141, s. 5
- SOR/85-176, s. 4
- SOR/88-165, s. 29(F)
- SOR/89-135, s. 3
- SOR/94-686, ss. 31(F), 58(F)
- 69(F), 70(F), 78(F), 79(F)
- SOR/96-228, s. 2
- SOR/97-505, s. 8
- 2009, c. 2, s. 112
- 2013, c. 34, ss. 46, 85, 401
- 2014, c. 39, s. 88
- 2017, c. 33, s. 97
- 2018, c. 27, s. 39
- 2024, c. 15, s. 83
- Date modified: