Income Tax Severed Letters

Principal Issues: In a situation where a foreign affiliate was acquired by a corporation resident in Canada towards the end of the taxation year of the foreign affiliate, does paragraph 5907(8)(a) of the Regulations apply to a foreign merger that occurred earlier in the same year to deem the first day of the taxation year of the foreign affiliate that results from the merger to be the day on which the merger occurred for the purposes of calculating the various surplus accounts provided for in subsection 5907(1) of the Regulations, if no corporation resident in Canada held an interest directly or indirectly in the foreign affiliate immediately after the merger?

Position: No.

Reasons: The acquisition of shares of a foreign corporation by a corporation resident in Canada in the taxation year of a foreign affiliate does not result in paragraph 5907(8)(a) of the Regulations applying retroactively to the day of the foreign merger earlier in the taxation year of the foreign affiliate if, at the time of the merger, the resulting foreign corporation was not a foreign affiliate of a corporation resident in Canada.