Principal Issues: Where an agreement with the Canadian competent authority entered into pursuant to paragraph 5 of Article XXIX provides that a US S Corporation is a controlled foreign affiliate as defined in subsection 95(1) (“CFA”) of an individual, is a deduction from income under subsection 91(5) or any other provision available in respect of a dividend paid after the cancellation of the agreement? In particular, is a deduction available in respect of a dividend paid by a US S corporation where, at the time of the dividend payment, the US S corporation was either i) a CFA of the individual; or ii) not a foreign affiliate as defined in subsection 95(1) of the individual. Would the adjusted cost base (“ACB”) of the shares of the US S corporation to the shareholder be reduced?
Position: In the circumstances, i) the dividend would be deductible and the ACB of the shares would be reduced and ii).
Reasons: i) A deduction under subsection 91(5) would be available as the S corporation is a controlled foreign affiliate of the individual at all times and the dividend paid after the expiry of the agreement is prescribed to have been paid from its taxable surplus under subsection 5900(3) of the Regulations and a corresponding adjustment to the ACB would result from that. ii) A deduction under subsection 91(5) would not be available given that the S corporation is not a foreign affiliate of the individual at the time of the dividend payment and the dividend paid after the expiry of the agreement is not prescribed to have been paid from taxable surplus under subsection 5900(3) of the Regulations, hence the ACB would not be adjusted. Subsection 248(28) would not apply because the FAPI inclusion and the amount of the dividend received.
