CRA finds that Reg. 5901(2)(b)(ii)(A) does not taint a siloed dividend paid by FA to Canco1 even though another Canco holds other FA shares through an LP

Canco1 owns 100% of the Class A shares, and a limited partnership (LP) with partners (including Canco 2) at arm’s length with Canco1 owns 100% of the Class B shares, of a foreign affiliate (FA) respecting Canco1 and 2. FA pays a dividend to Canco1 on the Class A shares. Could Canco1 elect under Reg. 5901(2)(b) to have the dividend received by it treated as paid out of pre-acquisition surplus of FA (i.e., treated as an ACB reduction)?

Although there was textual ambiguity on the point, CRA found (with some assistance from the Explanatory Notes) that the Reg. 5901(2)(b)(ii)(A) requirement, that no member of LP (i.e., Canco 2) be a corporation that is otherwise eligible to elect under Reg. 5901(2)(b)(i), was only applicable where such LP in fact was receiving a dividend that otherwise could be elected upon to reduce the ACB of shares.

However, the Reg. 5901(2)(b)(ii)(A) tainting of a dividend by FA to Canco1(and Canco 2) would apply if FA had only one class of shares and a dividend was paid on a pro rata basis to both Canco1 and LP.

Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.7 under Reg. 5901(2)(b)(ii).