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.
Subject: XXX
As a result of a recent ruling request, we have reconsidered our position with respect to two of the issues discussed in our memorandum to you dated August 15, 1991 regarding XXX
We reconfirm that deficit balances of lower-tier foreign affiliates of a corporation should not be ignored when computing the "Income earned or realized" by that corporation. Our reasons are as stated in our August 15 memorandum and will not be reiterated now.
Regarding the treatment of stub period earnings of a foreign affiliate of a corporation, it is our view that such earnings, to the extent they accrued during the relevant holding period, should be included in the income earned or realized by that corporation for purposes of subsection 55(2). This includes both the stub period commencing immediately after acquisition of the subject shares and the stub period ending immediately prior to the particular time. In our opinion the purpose of paragraph 55(5)(d) is to ensure that taxable surplus of a foreign affiliate that has not been subject to tax in the foreign jurisdiction will not be considered income earned or realized. Income earned or realized would therefore not include stub period earnings that if included in the surplus accounts and paid out as dividends could not be deducted under paragraphs 113(1)(a) or (b). Paragraphs 55(5)(b), (c) and (d) do not provide that the amount computed under those paragraphs represents an amount of income earned or realized that could reasonably be considered to attribute to the capital gain. In fact the amount determined under those paragraphs will normally not equal the amount of income earned or realized that is on hand at the time the determination of the components of the gain is relevant. For example, the computation under paragraph 55(5)(d) could include the earnings for the first taxation year of the affiliate ending after it became a foreign affiliate of the taxpayer. However only earnings accruing after the affiliate was acquired would attribute to the capital gain.
We hope our comments are of assistance.
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