Income Tax Regulations

5901 (1) Where at any time in its taxation year a foreign affiliate of a corporation resident in Canada has paid a whole dividend on the shares of any class of its capital stock, for the purposes of this Part

• (a) the portion of the whole dividend deemed to have been paid out of the affiliate’s exempt surplus in respect of the corporation at that time is an amount equal to the lesser of

  • (i) the amount of the whole dividend, and

  • (ii) the amount by which that exempt surplus exceeds the affiliate’s taxable deficit in respect of the corporation at that time;

• (b) the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation at that time is an amount equal to the lesser of

  • (i) the amount, if any, by which the amount of the whole dividend exceeds the portion determined under paragraph (a), and

  • (ii) the amount by which that taxable surplus exceeds the affiliate’s exempt deficit in respect of the corporation at that time; and

• (c) the portion of the whole dividend deemed to have been paid out of the affiliate’s pre-acquisition surplus in respect of the corporation at that time is the amount by which the whole dividend exceeds the aggregate of the portions determined under paragraphs (a) and (b).

(2) Notwithstanding subsection (1), where a foreign affiliate of a corporation resident in Canada pays a whole dividend (other than a whole dividend referred to in subsection 5902(1)) at any particular time in its taxation year that is more than 90 days after the commencement of that year or at any particular time in its 1972 taxation year that is before January 1, 1972, the portion of the whole dividend that would, but for this subsection, be deemed to have been paid out of the affiliate’s pre-acquisition surplus in respect of the corporation is deemed to have been paid out of the exempt surplus and taxable surplus of the affiliate in respect of the corporation to the extent that it would have been deemed to have been so paid if, immediately after the end of that year, that portion were paid as a separate whole dividend before any whole dividend paid after the particular time and after any whole dividend paid before the particular time by the affiliate, and for the purposes of determining the exempt deficit, exempt surplus, taxable deficit, taxable surplus and underlying foreign tax of the affiliate in respect of the corporation at any time, that portion is deemed to have been paid as a separate whole dividend immediately following the end of the year and not to have been paid at the particular time.

(3) Notwithstanding subsections (1) and (2), for the purposes of the definitions exempt deficit, exempt surplus, taxable deficit and taxable surplus in subsection 5907(1), any amount designated pursuant to subsection 5900(2) in respect of a dividend paid by a foreign affiliate of a corporation resident in Canada increases the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation and decreases the portion of the whole dividend deemed to have been paid out of the affiliate’s exempt surplus in respect of the corporation.