CRA finds that Reg. 5907(8)(a) is limited to mergers of what are already foreign affiliates of a corporation resident in Canada

A resident individual wholly owned Canco, and also wholly owned FA1 which wholly owned FA2.

In November of a particular year, FA1 and FA2 were merged, with FA1 as the survivor. Then, that December, the individual transferred all of the shares of FA1 to Canco on a s. 85(1) rollover basis.

In confirming that Reg. 5907(8)(a) would not apply in respect of that merger to deem the taxation years of the two FAs to terminate and (in the case of FA1) restart with the merger for surplus-computation purposes because, at the time of the merger, FA1 and FA2 were not yet foreign affiliates of Canco, the Directorate first noted, as relevant context, that Reg. “5907(8)(a) is relevant to the computation under subsection 5905(3) for the purpose of determining the various initial surpluses or deficits of the foreign affiliate resulting from the merger in relation to a corporation resident in Canada,” and then stated:

The grammatical and ordinary meaning of the words “foreign affiliate of a corporation resident in Canada” found in paragraph 5907(8), read in their specific context with regard to the purpose of the foreign affiliate regime and, in particular, taking into account the close link between that paragraph and subsection 5905(3), demonstrates that those words refer to a foreign corporation having that status in relation to a corporation resident in Canada immediately following the merger.

A textual, contextual and purposive interpretation of the provision does not reveal any elements supporting a conclusion that the terms of paragraph 5907(8)(a) could have retroactive effect where the status referred to in the provision is acquired at a time subsequent to the merger.

Neal Armstrong. Summary of 14 January 2026 Internal T.I. 2023-0990701I7 F under Reg. 5907(8)(a).