CRA rules on the set-off of an upstream loan against a dividend

A non-resident subsidiary (ForeignHoldco) of Canco will eliminate a non-interest-bearing loan previously made by it to Canco by declaring a dividend, paying the dividend by issuing a demand promissory note and then receiving the note from Canco in payment of the loan.  The only requested ruling was to the effect that dividends (including a liquidating dividend) previously received by ForeignHoldco from a Malaysian-resident subsidiary - whose income had been subject to Malaysian income tax at a rate of, at most, 3% on the basis that it was carrying on an offshore business activity in Labuan (an island which was a Malaysian federal territory) - qualified as an addition to ForeignHoldco’s exempt surplus in respect of that Labuan subsidiary.

Neal Armstrong.  Summary of 2013 Ruling 2013-0477871R3 under Reg. 5907(11.2).