CRA makes favourable ordering assumptions in applying the surplus application (s. 90(9)) upstream loan rule

S. 90(9) permits the s. 90(6) income inclusion to Canco, that otherwise would result from an unpaid upstream loan to it from FA, to be reduced by applicable FA surplus balances. However, s. 90(9)(b) provides that such surplus must "not [be] relevant…in respect of any deduction claimed under subsection…113(1) in respect of a dividend paid, during the period in which the particular loan…is outstanding… ."

CRA is flexible in applying this exclusion. For example, it is willing to treat exempt surplus as being reduced on a LIFO basis so that, if following the upstream loan, there is an actual FA dividend, it is willing to treat that as coming out of subsequently generated exempt surplus rather than trenching for s. 90(9)(b) purposes on previous exempt surplus that may be needed under s. 90(9). Furthermore, CRA notes that "that the relevant time at which to measure surplus is the [s. 90(6)] dividend time and not any time in a subsequent year in which a subsection 90(9) deduction is claimed to offset a subsection 90(12) inclusion [bringing back into income a previous year’s s. 90(9) deduction]," so that it would not matter for s 90(9) purposes if there is an exempt loss is a year subsequent to that for the dividend time.

Finally, in an extension of 2013-0483791C6 (where CRA indicated that a Reg. 5901(2)(b) election can be made on a notional s. 90(9) dividend), and assuming the numbers work, CRA considers that the s. 90(6) deemed dividend from Upstream Loan 1 can be eliminated under s. 90(9) based on exempt surplus at the time, and that the s. 90(6) deemed dividend from Upstream Loan 2 can be eliminated under s. 90(9) based on making a Reg. 5901(2)(b) election on this notional dividend.

Neal Armstrong. Summary of 28 May 2015 IFA Roundtable, Q. 4, 2015-0581501C6 under s. 90(9).