CRA indicates that it generally denies a s. 113(1) deduction where Canco has failed to prepare surplus accounts – which failure also will preclude a late-filed Reg. 5901(2)(b) election

Canco does not prepare detailed calculations of its various surplus and underlying tax balances in respect of a wholly-owned subsidiary (FA) from which it received a dividend, and claims a full s. 113(1) deduction for that dividend (without knowing how much is a deduction under s. 113(1)(a) rather than, say, s. 113(1)(d).)

CRA indicated that if a complete surplus computation is not provided to it, its current general practice is to deny the s. 113(1) deduction. Furthermore, an unsupported s. 113(1) claim could be subject inter alia to ss. 152(4), 163(2), 163(2.2) or 239(1), depending on the circumstances. (This seems to be misaligned with the jurisprudence. An assessment is of a particular dollar amount of tax, and it does not matter what route was reached to get to that figure – see, e.g., Consumers’ Gas. Furthermore (to draw an analogy with surplus account records), expense deductions may be accepted in circumstances falling well short of full supporting documentation – see, e.g., Staltari, Weinberger, Samra, Savoidakis, Sidhu.)

A related question: Would CRA accept the late-filing by Canco of an election under Regs. 5901(2.1) and (2.2) in order for the dividend to be completely sheltered by the s. 113 (e.g., if it later discovered that it had hybrid or taxable surplus)?

CRA indicated that relying on surplus balances unsubstantiated by a detailed computation would generally not meet the condition in Reg. 5901(2.1)(b) of having demonstrated making reasonable efforts respecting this predicament before the filing-due date.

In addition to the situation submitted not satisfying that test, it also would be the CRA view that it would not be “just and equitable” (per Reg. 5901(2.2)) to permit the filing of a late election where Canco did not make detailed calculations of its relevant surplus accounts because of its assumption that the late election, and related ACB deduction, would result in no income inclusion.

Neal Armstrong. Summaries of 15 May 2019 IFA Roundtable, Q.9 under s. 113(1)(a) and Reg. 5901(2.2).