Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
R.C. O'Byrne (613) 957-2126
Attention: XXXX
Dear Sirs:
Re: Dividends paid by a Foreign Affiliate
This is in reply to your letter of October 7, 1988 in which you asked for our views about how dividends paid by foreign affiliates would effect surplus calculations in the following hypothetical situation:
1. Canco, a Canadian Corporation with a December 31st year end, acquires 20% of the stock of U.S. Holdco on March 31, 19-1. There was not a change in control of U.S. Holdco as a result of Canco's acquisition of 20% of its stock.
2. U.S. Holdco is a U.S. holding company which owns 100% of the stock of U.S. Opco. U.S. Holdco and U.S. Opco file a consolidated return for U.S. tax purposes and have a fiscal year end of October 31st.
3. U.S. Holdco has no activity, and its only source of income is dividends paid to it by U.S. Opco.
4. U.S. Opco is carrying on an active business in the U.S., and generates $2M of exempt earnings as defined in paragraph 5907(1)(b) of the Income Tax Regulations (the Regulations) for the year ended October 31, 19-1, which is the first taxation year in which U.S. Opco is a foreign affiliate of Canco.
5. On August 31, 19-1 more than 90 days after the commencement at its current taxation year, U.S. Opco pays a dividend of $1M to U.S. Holdco.
6. On September 30, 19-1, U.S. Holdco pays a dividend of $1M, of which $200K is paid to Canco.
Our Views
The $1M dividend paid by U.S. Opco on August 31, 19-1 would be deemed by subsection 5901(2) of the Regulations to be paid out of U.S. Opco's exempt surplus immediately after October 31, 19-1 because U.S. Opco had no exempt surplus on August 31, 19-1 and had exempt earnings for the year ended October 31, 19-1. Because this dividend is deemed by subsection 5901(2) of the Regulations to be paid immediately after October 31, 19-1 it may not be included in U.S. Holdco's exempt surplus calculation until immediately after October 31, 19-1. Consequently, when U.S. Holdco pays the $1M dividend on September 30, 19-1 it will not have any exempt surplus on hand. However, the provisions of subsection 5901(2) of the Regulations will deem U.S. Holdco's $1M dividend to have been paid out of exempt surplus immediately after October 31, 19-1 if it had exempt surplus on hand at that time. U.S. Holdco would have exempt surplus on hand immediately after October 31, 19-1 because the $1M dividend, actually paid by U.S. Opco to U.S. Holdco on August 31, 19-1 and deemed paid by subsection 5901(2) of the Regulations to have been paid immediately after October 31, 19-1, would be considered to be included in U.S. Holdco's exempt surplus before U.S. Holdco is deemed by subsection 5901(2) of the Regulation to have paid a separate whole dividend of $1M immediately after October 31, 19-1.
We trust this will be of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1989
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1989