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

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Regulations are current to 2019-07-01 and last amended on 2019-06-25. Previous Versions

PART LIXForeign Affiliates (continued)

[[NOTE: Application provisions are not included in the consolidated text; see relevant amending Acts and regulations.] ]

Interpretation (continued)

  •  (1) For the purposes of this subsection, subsections (2) to (7), paragraph 5902(2)(b) and section 5905, if at any time shares of a class of the capital stock of a foreign affiliate of a corporation resident in Canada are, based on the assumptions contained in paragraph 96(1)(c) of the Act, owned by a partnership, or are deemed under this subsection to be owned by a partnership, each member of the partnership is deemed to own at that time the number of shares of that class that is determined by the formula

    A × B/C

    where

    A
    is the number of shares of that class that are so owned or so deemed owned by the partnership;
    B
    is the fair market value of the member’s interest in the partnership at that time; and
    C
    is the fair market value of all members’ interests in the partnership at that time.
  • (2) For the purposes of subsections (4) and 5905(1), (5) and (7.1), if a person is deemed by subsection (1) to own at a particular time a different number of shares of a class of the capital stock of a foreign affiliate of a corporation resident in Canada (which shares so deemed owned are referred to in this subsection as “affiliate shares”) than the person was deemed by that subsection to have owned immediately before the particular time, the number of affiliate shares equal to that difference is deemed to be

    • (a) disposed of, at the particular time, by the person, when that person is deemed to own fewer affiliate shares at the particular time than immediately before it; and

    • (b) acquired by, at the particular time, the person, when that person is deemed to own more affiliate shares at the particular time than immediately before it.

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

    • (a) if a partnership of which a person is a member at any time does not own, and (but for this subsection) is not deemed by subsection (1) to own, any shares of a class of the capital stock of the foreign affiliate at that time, subsection (1) is deemed to have applied in respect of the person and to have deemed the person to own, because of subsection (1) in respect of the partnership, no shares of that class at that time; and

    • (b) if a corporation resident in Canada or a foreign affiliate of such a corporation disposes of or acquires its entire interest in a partnership that, based on the assumptions contained in paragraph 96(1)(c) of the Act, owns shares of a class of the capital stock of a non-resident corporation, the corporation resident in Canada or the foreign affiliate, as the case may be, is deemed at the time that is immediately after the disposition or immediately before the acquisition, as the case may be, to own, because of subsection (1) in respect of the partnership, no shares of that class.

  • (4) For the purposes of subsection 5905(5), if at any time a corporation resident in Canada (referred to in this subsection as the “disposing corporation”) disposes of shares of a class of the capital stock of a foreign affiliate of the disposing corporation and, as a consequence of the same transaction or event (other than one to which neither paragraph (2)(a) nor paragraph (2)(b) applies) that caused the disposition, a taxable Canadian corporation with which the disposing corporation is not, at that time, dealing at arm’s length acquires shares of that class, the disposing corporation is, at that time, deemed to have disposed of, to the taxable Canadian corporation, the number of the shares of that class that is determined by the formula

    A × B

    where

    A
    is the number of shares of that class disposed of by the disposing corporation; and
    B
    is
    • (a) if the taxable Canadian corporation acquires, because of paragraph (2)(b), shares of that class, the fraction determined by the formula

      C/D

      where

      C
      is the number of shares of that class that is deemed by that paragraph to be acquired by the taxable Canadian corporation as a result of the transaction or event, and
      D
      is the total of all amounts each of which is the number of shares of that class that is deemed by that paragraph to be acquired by a person as a result of the transaction or event, and
    • (b) in any other case, one.

  • (5) For the purposes of subsection 5905(5.1), if a predecessor corporation described in that subsection is, at the time that is immediately before the amalgamation described in that subsection, a member of a particular partnership that, based on the assumptions contained in paragraph 96(1)(c) of the Act, owns, at that time, shares of the capital stock of a foreign affiliate of the predecessor corporation and the predecessor corporation’s interest in the particular partnership, or in another partnership that is a member of the particular partnership, becomes, upon the amalgamation, property of the new corporation described in that subsection, the shares of the capital stock of the affiliate that are deemed under subsection (1) to be owned by the predecessor corporation at that time are deemed to become property of the new corporation upon the amalgamation.

  • (6) In applying subsection 5905(5.2), if the corporation is a member of a partnership that, based on the assumptions contained in paragraph 96(1)(c) of the Act, owns shares (referred to individually in paragraph (a) as a “relevant share”) of the affiliate’s capital stock at the particular time,

    • (a) for the purposes of the description of B in subsection 5905(5.2), the corporation’s cost amount of each relevant share at the particular time is to be determined by the formula

      P × Q/R

      where

      P
      is the partnership’s cost amount of that relevant share at the particular time,
      Q
      is the number of shares of the capital stock of the affiliate that are deemed by subsection (1), in respect of the partnership, to be owned by the corporation at the particular time, and
      R
      is the total number of relevant shares at the particular time; and
    • (b) for the purposes of paragraph (b) of the description of C in subsection 5905(5.2), the amount determined under this paragraph is the total of all amounts each of which is the amount that would be the corporation’s portion of a gain that would be deemed under subsection 92(5) of the Act to be a gain of the member of the partnership from the disposition of a share of the capital stock of the affiliate by the partnership if that share were disposed of immediately before the particular time.

  • (7) For the purposes of paragraph 5905(5.4)(b), the amount determined by this subsection is the amount determined by the following formula for shares of the capital stock of a foreign affiliate of the subsidiary that were deemed by subsection (1), in respect of the partnership, to be owned by the subsidiary at the time at which the parent last acquired control of the subsidiary:

    A × B

    where

    A
    is the tax-free surplus balance of the affiliate, in respect of the subsidiary, at that time; and
    B
    is the percentage that would be the subsidiary’s surplus entitlement percentage in respect of the affiliate at that time if the only shares of that capital stock that were owned at that time by the subsidiary were the shares of that capital stock that were deemed by subsection (1), in respect of the partnership, to be owned by the subsidiary at the time at which the parent last acquired control of the subsidiary.
  • (8) If a particular corporation resident in Canada or a particular foreign affiliate of a particular corporation resident in Canada is a member of a particular partnership, the particular partnership owns (based on the assumptions contained in paragraph 96(1)(c) of the Act) shares of a class of the capital stock of a foreign affiliate of the particular corporation and the particular partnership disposes of any of those shares,

    • (a) any reference in this Part (other than subsections 5902(5) and (6)) to subsection 93(1) of the Act is deemed to include a reference to subsection 93(1.2) of the Act;

    • (b) an election under subsection 93(1.2) of the Act by the particular corporation is to be made by filing the prescribed form with the Minister on or before

      • (i) where the particular corporation is the disposing corporation referred to in that subsection, the particular corporation’s filing-due date for its taxation year that includes the last day of the particular partnership’s fiscal period in which the disposition was made, and

      • (ii) where the particular affiliate is the disposing corporation referred to in that subsection, the particular corporation’s filing-due date for its taxation year that includes the last day of the particular affiliate’s taxation year that includes the last day of the disposing partnership’s fiscal period in which the disposition was made; and

    • (c) the prescribed amount for the purposes of subparagraph 93(1.2)(a)(ii) of the Act is the lesser of

      • (i) the taxable capital gain, if any, of the particular affiliate otherwise determined in respect of the disposition, and

      • (ii) the amount determined by the formula

        A × B × C/D

        where

        A
        is the fraction referred to in paragraph 38(a) of the Act that applies to the particular affiliate’s taxation year that includes the last day of the particular partnership’s fiscal period that includes the time of the disposition,
        B
        is the amount that could reasonably be expected to have been received in respect of all the shares of that class if the second foreign affiliate referred to in subsection 93(1.2) of the Act had, immediately before that time, paid dividends, on all shares of its capital stock, the total of which was equal to the amount determined under subparagraph 5902(1)(a)(i) to be its net surplus in respect of the particular corporation,
        C
        is the number of shares of that class that is determined under subsection 93(1.3) of the Act, and
        D
        is the total number of issued shares of that class immediately before that time.
  • (9) For the purposes of this Part, except to the extent that the context otherwise requires, if a person or partnership is (or is deemed by this subsection to be) a member of a particular partnership that is a member of another partnership, the person or partnership is deemed to be a member of the other partnership.

  • (10) For the purposes of paragraph 95(2)(j) of the Act, the adjusted cost base to a foreign affiliate of a taxpayer of an interest in a partnership at any time is prescribed to be the cost to the affiliate of the interest as otherwise determined at that time, and for those purposes

    • (a) there shall be added to that cost such of the following amounts as are applicable:

      • (i) any amount included in the affiliate’s earnings for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to profits of the partnership,

      • (ii) the affiliate’s incomes as described by the description of A in the definition foreign accrual property income in subsection 95(1) of the Act for a taxation year ending after 1971 and before that time that can reasonably be considered to relate to profits of the partnership,

      • (iii) any amount included in computing the exempt earnings or taxable earnings, as the case may be, of the affiliate for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to a capital gain of the partnership,

      • (iii.1) any amount included in computing the hybrid surplus or hybrid deficit of the affiliate before that time that may reasonably be considered to relate to a capital gain of the partnership,

      • (iv) where the affiliate has, at any time before that time and in a taxation year ending after 1971, made a contribution of capital to the partnership otherwise than by way of a loan, such part of the amount of the contribution as cannot reasonably be regarded as a gift made to or for the benefit of any other member of the partnership who was related to the affiliate,

      • (v) such portion of any income or profits tax refunded before that time by the government of a country to the partnership as may reasonably be regarded as tax refunded in respect of an amount described in any of subparagraphs (b)(i) to (iii), and

      • (vi) the amount, if any, determined under paragraph (11)(b);

    • (b) there shall be deducted from that cost such of the following amounts as are applicable:

      • (i) any amount included in the affiliate’s loss for a taxation year ending after 1971 that may reasonably be considered to relate to a loss of the partnership,

      • (ii) the affiliate’s losses as described by the description of D in the definition foreign accrual property income in subsection 95(1) of the Act for a taxation year ending after 1971 and before that time that can reasonably be considered to relate to the losses of the partnership,

      • (iii) any amount included in computing the exempt loss or taxable loss, as the case may be, of the affiliate for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to a capital loss of the partnership,

      • (iii.1) any amount included in computing the hybrid surplus or hybrid deficit of the affiliate before that time that may reasonably be considered to relate to a capital loss of the partnership,

      • (iv) any amount received by the affiliate before that time and in a taxation year ending after 1971 as, on account or in lieu of payment of, or in satisfaction of, a distribution of the affiliate’s share of the partnership profits or partnership capital, and

      • (v) such portion of any income or profits tax paid before that time to the government of a country by the partnership as may reasonably be regarded as tax paid in respect of an amount described in any of subparagraphs (a)(i) to (iii); and

    • (c) for greater certainty, where any interest of a foreign affiliate in a partnership was reacquired by the affiliate after having been previously disposed of, no adjustment that was required to be made under this subsection before such reacquisition shall be made under this subsection to the cost to the affiliate of the interest as reacquired property of the affiliate.

  • (11) If at any time a partnership owns, based on the assumptions contained in paragraph 96(1)(c) of the Act, a share of the capital stock of a particular foreign affiliate of a corporation resident in Canada and one or more members of the partnership is at that time a direct holder referred to in paragraph 5905(7.6)(a) or a subordinate affiliate referred to in paragraph 5905(7.6)(b), the following rules apply:

    • (a) for the purposes of paragraph 92(1.1)(b) of the Act, there is to be added, in computing at or after that time the partnership’s adjusted cost base of the share, the total of all amounts each of which is the amount determined, in respect of an acquired affiliate referred to in subsection 5905(7.6), by the formula

      A × B

      where

      A
      is the amount, if any, determined under paragraph 5905(7.2)(a) in respect of the acquired affiliate, and
      B
      is the percentage that would, if the partnership were a corporation resident in Canada, be the partnership’s surplus entitlement percentage in respect of the acquired affiliate, at the adjustment time, if the partnership owned only the share;
    • (b) for the purposes of subparagraph (10)(a)(vi), the amount determined under this paragraph, in respect of the interest in the partnership of the direct holder or the subordinate affiliate, is the amount determined by the formula

      A × B/C

      where

      A
      is the total of all amounts each of which is the amount, if any, determined under paragraph (a) in respect of a share of the capital stock of the particular affiliate,
      B
      is the fair market value, at the adjustment time, of the interest in the partnership of the direct holder or the subordinate affiliate, as the case may be, and
      C
      is the fair market value, at the adjustment time, of all members’ interests in the partnership; and
    • (c) no amount is to be added under subsection 5905(7.6) to the direct holder’s or the subordinate affiliate’s adjusted cost base of the share.

  • (12) For the purposes of paragraph 5905(7.7)(b), the amount determined under this subsection is the amount determined by the formula

    A × B/C

    where

    A
    is the adjustment amount;
    B
    is the fair market value, at the adjustment time, of the interest in the partnership that is referred to in paragraph 92(1.1)(b) of the Act of the particular foreign affiliate that is referred to in paragraph 93(3)(c) of the Act; and
    C
    is the fair market value, at the adjustment time, of all members’ interests in the partnership.
  • (13) For the purposes of clauses 5907(2.9)(a)(i)(B) and (ii)(B), the amount determined under this subsection is, subject to subsection (14), the amount determined by the formula

    A × B/C

    where

    A
    is
    • (a) if clause 5907(2.9)(a)(i)(B) applies, the amount determined under clause 5907(2.9)(a)(i)(A), and

    • (b) if clause 5907(2.9)(a)(ii)(B) applies, the amount determined under clause 5907(2.9)(a)(ii)(A),

    B
    is the affiliate’s direct or indirect share of the partnership’s income or loss for the preceding taxation year, and
    C
    is the partnership’s income or loss for the preceding taxation year.
  • (14) For the purposes of subsection (13), if both the income and loss of the partnership for the preceding taxation year are nil, the descriptions of B and C in the formula in that subsection are to be applied as if the partnership had income for that year in the amount of $1,000,000.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • SOR/97-505, s. 9
  • 2013, c. 34, ss. 47, 86
 
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