Section 113

Subsection 113(1) - Deduction in respect of dividend received from foreign affiliate

Administrative Policy

2004 Miscellaneous 2004-0103111R3 - Foreign affiliates; indirect payment

Ruling that a U.S. LLC would be considered a corporation, that the ownership interest of a member would be considered shares, and that distributions would be considered to be dividends.

93 C.R. - Q. 59

Where all of the shares of a non-resident corporation are owned by a trust whose sole beneficiary is a corporation resident in Canada, dividends paid by the non-resident corporation to the trust that are then paid by the trust to the Canadian corporation will be received as income from a trust and not dividends, unless the trust is a bare trust. Accordingly, if the trust is not a bare trust, s. 113(3) will not apply.


Kenneth Snider, "Selecting the Foreign Business Entity: A Review of the Canadian Tax Treatment of U.S. Taxes Paid By a Member (Shareholder) of a U.S. Limited Liability Corporation", International Tax Planning, 2002 Canadian Tax Journal, Vol. 50 No. 2, p. 705.

Lanthier, "Emerging Income Tax Issues: Public Service 2,000, International Finance Companies, and U.S. Limited Liability Companies", 1993 Conference Report, pp. 3:19 - 29

Discussion of U.S. limited liability companies.

Paragraph 113(1)(a)

Administrative Policy

15 May 2019 IFA Roundtable Q. 9, 2019-0798761C6 - Surplus Documentation

CRA generally denies a s. 113(1) deduction where Canco has failed to prepare surplus accounts
essentially the same comments made in 11 October 2019 APFF Roundtable, Q.8

Canco, which did not prepare a detailed calculation of its exempt surplus, hybrid surplus and taxable surplus accounts, nor of its hybrid underlying tax and underlying foreign tax accounts in respect of FA. FA claimed a s. 113(1) deduction (the “113 Deduction”) equalling the amount of a dividend received from a wholly-owned foreign affiliate (“FA”) based on the general ordering rules in Regs. 5900(1) and 5901(1). Should a more careful review indicate that the dividend was not otherwise fully sheltered by the 113 Deduction, Canco would wish to utilize the adjusted cost base (“ACB”) of the FA shares.

Are detailed surplus account computations essential to support the 113 Deduction?

CRA indicated that if a complete surplus computation is not provided to it, its current general practice is to deny the deduction under s. 113(1). Furthermore, s. 230(1) specifically requires taxpayers to retain records and books of account in such form, and containing such information, as will enable the determination of taxes payable under the Act. An unsupported s. 113(1) claim could be subject inter alia to ss. 152(4), 163(2), 163(2.2) or 239(1), depending on the circumstances.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 5901 - Subsection 5901(2.2) failure by Canco to prepare surplus accounts precludes late- filed Reg. 5901(2)(b) election 221

2 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 11, ¶1049)

Interest paid by U.S. subsidiary which is recharacterized as a dividend for U.S. purposes will be taxed as interest income in the hands of the Canadian parent.

81 C.R. - Q.12

RC will not issue rulings allowing a Canadian corporation to use a Netherlands corporation as an intermediary to make interest-bearing loans to a U.S. corporation.


Nathan Boidman, Michael N. Kandev, "Expected Adverse Effects of Proposed U.S. Anti-Hybrid Regulations on Inbound Financing by Canadian MNEs", Tax Notes International, February 11, 2019, p. 623

Anti-hybrid rule in IRC s. 267A (p. 624)

[S]ection 267A targets deduction/non-inclusion (D/NI) situations.

A broadly worded grant of regulatory authority giving the Secretary of the Treasury the power to issue any regulations or other guidance that might be necessary or appropriate to carry out the purposes of the section accompanies this simple rule.

Cross-border repo financing structure (p. 628)

A simple repo would involve a U.S. holding company selling special preferred shares in a subsidiary U.S. operating company to the U.S. group's foreign parent subject to a forward (re)purchase agreement under which the foreign parent would sell the preferred stock back to the U.S. holding company (or a disregarded LLC subsidiary). Under the substance-over-form principle, U.S. tax law would see this arrangement as secured lending by the foreign parent to the U.S. group giving rise to otherwise deductible interest. In Canada, the U.S. company's preferred shares would normally entitle a Canadian parent to dividends that can benefit from the exempt surplus dividend received deduction. However, prop. reg. 1.267A-2(a)(3) and Example 2 show that when (and if) the regulations become final, repo financings would give rise to nondeductible interest in the U.S.

Lanthier, "Foreign Holding Companies and Finance Vehicles: An Update", 1990 Conference Report, c. 42

Paragraph 113(1)(a.1)


Sandra Slats, David Burns, "Canada Considers New Rules on Repatriation", Tax Notes International, Vol 63, No. 9, 29 August 2011, p. 641

General discussion of hybrid surplus proposals.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(4) 2

Paragraph 113(1)(c)

Administrative Policy

11 June 2013 STEP Roundtable, 2013-0480321C6 - 2013 STEP Question 6 US LLCs - FAPI, FAT and FTCs

Is the US tax paid by a Canadian-resident taxpayer on the income (which also is foreign accrual property income) of an LLC which is owned by it (and is a controlled foreign affiliate) considered to be foreign accrual tax in respect of the LLC?

After noting that the US tax paid paid by the taxpayer would not qualify as FAT, CRA stated that if the taxpayer was a corporation:

any US tax paid in respect of [its] share of the income of the LLC would not be creditable for purposes of subsection 126(1) nor deductible for purposes of subsection 20(12) because the tax would be paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation. However…a deduction under paragraph 113(1)(c) would be available in respect of the US tax paid by a corporation resident in Canada in respect of the income of an LLC where a dividend distribution out of taxable surplus is received from the LLC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) deduction for US tax on LLC income which also is FAPI 157
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Tax 316


Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

113(1)(c) deduction where LLC dividends paid after Cdn corporate member pays tax on LLC FAPI (p. 26)

If the LLC is a foreign affiliate earning FAPI…U.S. tax paid by the Canadian corporation in respect of the LLC's income will not qualify as UFT, as the definition of UFT - even as amended by Bill C-43 - only applies to taxes paid by a foreign affiliate of the taxpayer, not by the taxpayer itself. [fn 115: … 9703535…] Accordingly, no deduction will be available under paragraph 113(l)(b) in respect of distributions paid out of the LLC's taxable surplus. However, the CRA considers the U.S. tax paid for a year in respect of an LLC's income to be in respect of dividends derived from the shares of the LLC, even if the LLC does not pay dividends in the year for which the U.S. tax is paid. Accordingly, when the LLC pays a taxable surplus dividend, relief from double tax is available in the form of a deduction under paragraph 113(l)(c). [fn 116: … 9703535…9821495…2013-0480321C6 [above]…]

…[A] timing issue remains in this latter context if the LLC is a controlled foreign affiliate and is not able to distribute all of its income each year, as the applicable share of the LLC's FAPI will be required to be included in the member's income in the taxation year in which it is received, without an offsetting deduction for FAT.