CRA indicates that s. 90(9)(b) does not preclude annual s. 90(9) deductions for an upstream loan from CFA based on its ES followed by using that ES to repay the upstream loan

Canco received a loan from a controlled foreign affiliate (“CFA”) that remained outstanding at the end of years 1, 2 and 3, and was then repaid in year 4 by means of a dividend distributed out of CFA's exempt surplus. In years 1 to 3, Canco included the loan amount under s. 90(6) (in year 1) or s. 90(12) (in years 2 and 3), and claimed a new deduction under s. 90(9) in each of those years, based on CFA having sufficient exempt surplus when the loan was made.

Did the stipulation in s. 90(9)(b), that the CFA exempt surplus must be “not relevant in applying this subsection in respect of ... any deduction under subsection ... 113(1) in respect of a dividend paid, during the period in which the particular loan … is outstanding” signify that Canco could not access the s. 90(9) deductions in years 1 to 3, because the loan was still outstanding in year 4 at the time that the dividend was paid out of exempt surplus?

CRA indicated that it considers this stipulation to be targeted at the years in which the s. 90(9) deduction is claimed so that, if in one of those years the surplus was relevant to taking a s. 90(9) deduction regarding another loan or to a s. 113(1) deduction for a dividend paid in the year, the s. 90(9) deduction would thereupon cease to be available. Since the s. 90(9)(b) condition was met during the years (1 to 3) for which the s. 90(9) deductions were claimed, such deductions were permitted for those years, and s. 90(9)(b) only applied during year 4 to prohibit a s. 90(9) deduction in that year.

Neal Armstrong. Summary of 5 May 2021 IFA Roundtable, Q.8 under s. 90(9)(b).