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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Computation of Exempt and Taxable Surplus
This is in reply to your letter dated March 29, 1993 concerning the computation of the exempt and taxable surplus of a foreign affiliate in respect of a taxpayer. The hypothetical fact situation is as follows:
1) A corporation ("FA") not resident in Canada, has a December 31 year end.
2) In June 19X2, FA pays a dividend (the "June 19X2 dividend").
3) In October 19X2, a corporation ("Canco") resident in Canada, acquires shares in FA sufficient to make it a foreign affiliate, as defined in paragraph 95(1)(d) of the Income Tax Act (the "Act"), of Canco.
You question whether the June 19X2 dividend would reduce the amount computed to be the exempt surplus or taxable surplus of FA in respect of Canco at any particular time.
It is our view that the June 19X2 dividend would not enter into the computation of the exempt or taxable surplus of FA in respect of Canco. Such a dividend would not be a "whole dividend" as defined in paragraph 5907(1)(n) of the Regulations to the Act (the "Regulations") because it was not paid "on the shares of a class of the capital stock of a foreign affiliate of a taxpayer" since at the time the dividend was paid, FA was not a foreign affiliate of Canco. Pursuant to subparagraph 5907(1)(d)(xi) of the Regulations, a "...portion of any whole dividend paid by the affiliate...", is deducted in computing the exempt surplus of a foreign affiliate in respect of a corporation. Similarly, pursuant to subparagraph 5907(1)(k)(x) of the Regulations, a "...portion of any whole dividend paid by the affiliate..." is deducted in computing the taxable surplus of the affiliate in respect of a corporation. Accordingly, since the June 19X2 dividend is not a "whole dividend" those subparagraphs would not operate to reduce the exempt or taxable surplus of FA in respect of Canco as a consequence of such dividend.
We trust this is the information you require.
Yours Truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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