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: Paragraph 5902(2)(a) of the Regulations to the Act
This is in reply to your letter wherein you requested clarification of the operation of section 5902 of the Regulations to the Income Tax Act (the "Act") in the following hypothetical circumstances:
1) A corporation resident in Canada ("Canco") owns 95% of the common shares of a foreign affiliate ("FA1") which in turn owns 100% of the common shares of a second foreign affiliate ("FA2"). FA2 owns 5% of the common shares of FA1. Both FA1 and FA2 have exempt surplus balances in respect of Canco.
2) Canco disposes of its shares of FA1 to a third party and elects under subsection 93(1) of the Act to have a portion of the proceeds of disposition deemed to be a dividend received on those shares.
In computing the exempt surplus of FA1 for the purpose of the subsection 93(1) election, you request our interpretation whether FA1 or FA2 would be the "particular foreign affiliate" referred to in paragraph 5902(2)(a) of the Regulations.
In our view, FA2 is the "particular foreign affiliate" for the purpose of paragraph 5902(2)(a) of the Regulations in these circumstances.
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, 1994
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© Sa Majesté la Reine du Chef du Canada, 1994
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