Complexities can arise in determining the contribution of foreign affiliates to safe income on hand

S. 55(5)(d) provides that the safe income of a foreign affiliate of a taxpayer is the lesser of its tax free surplus balance respecting the taxpayer (computed on a somewhat modified basis) and the fair market value of all its shares.

It may be possible to engage in transactions to increase a foreign affiliate’s TFSB by, for example, paying up interaffiliate dividends in order to blend the applicable excess hybrid underlying tax of one affiliate with a "low-taxed" hybrid surplus pool of another (having regard to the inclusion in TFSB of hybrid surplus of a particular foreign affiliate only if such surplus is "fully sheltered" by hybrid underlying tax.)

Reliance for safe income purposes on a computed TFSB balance may be problematic given the possibility of retroactive adjustments to surplus balances, for example, as a result of amending returns in the local jurisdiction, or as a result of retroactive adjustments to surplus pools arising from adjustments under Reg. 5907(1.1) to reduce (or increase) each group member’s surplus pools for local tax borne by (or refunded to) it.

The rule in s. 93.1(1) for looking through partnerships does not apply for purposes of s. 55(5)(d). This may not be as bad as it sounds. S. 55(2.1)(c) merely refers to the amount of the income earned or realized by any corporation, and Lamont Management concluded that the reference to “any corporation” can include a foreign non-affiliate.

Neal Armstrong. Summary of Jim Samuel, "Interaction of the Foreign Affiliate Surplus and Safe-Income Regimes: Selected Anomalies, Issues, and Planning Considerations", Canadian Tax Journal, (2018) 66:2, 269-307 under s. 55(5)(d).