A disproportionate UFT claim may eliminate Canadian tax otherwise arising on a s. 93(1) deemed dividend
Suppose that Canco would otherwise realize a capital gain on a liquidation and dissolution of a foreign subsidiary (FA) under s. 88(3). Rather than making a suppression election, it elects under s. 93(1) for the gain to be a dividend. There is plenty of taxable surplus (as a result of previously taxed FAPI) but, absent further planning, there is insufficient underlying foreign tax (UFT) to completely offset the dividend with a (proportionate) s. 113(1)(b) deduction.
That planning could be the claiming by it of a disproportionate amount of UFT with respect to the dividend received (per para. (b) of the “underlying foreign tax applicable” definition in Reg. 5907(1)) instead of a proportionate deduction under s. 113(1)(b). Thus, if there was sufficient UFT in respect of FA, Canco could claim additional UFT sufficient to create an additional deduction that completely eliminates the dividend income.
Neal Armstrong. Summary of Tu Vu, “Application of Disproportionate UFT Election,” Canadian Tax Focus, Vol. 11, No. 4, November 2021, p. 15 under Reg. 5907(1) - underlying foreign tax applicable – para. (b).