Section 91

Subsection 91(1) - Amounts to be included in respect of share of foreign affiliate


Canada v. Loblaw Financial Holdings Inc., 2021 SCC 51

two policies balanced in FAPI regime

After providing an overview of the FAPI system, Côté J stated (at para. 56):

... I conclude that the specific provisions relating to FAPI were enacted to serve Parliament’s broader purpose of balancing capital export neutrality and the protection of the competitiveness of Canadian businesses operating abroad by targeting passive income. I have no information showing that the arm’s length requirement has a specific purpose of anti-avoidance or promotion of international competitiveness.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business “business conducted,” as contrasted to “business,” did not include the raising of capital 229
Tax Topics - General Concepts - Foreign Law meaning of banking business under Barbados law was not persuasive 234
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Investment Business - Paragraph (a) bank business was conducted with arm's length persons notwithstanding that capital raised from shareholder 579
Tax Topics - Statutory Interpretation - Certainty full effect should be given to Parliament’s precise and unequivocal words to produce certainty 88
Tax Topics - Statutory Interpretation - Speaking in vain Parliament does not speak in vain 72
Tax Topics - Statutory Interpretation - Expressio Unius est Exclusio Alterius specific addition of a competition requirement in another provision implied that there was no such requirement here 152

Administrative Policy

15 December 2004 External T.I. 2004-0081411E5 F - Société étrangère

overview of FAPI rules/ rules in ss. 15(1), 56(2) or 246(1) apply in addition

CRA provided a general overview of the FAPI rules respecting a resident individual owning 60% of the shares of a foreign corporation earning all its income from foreign sources and not paying any dividends, and also noted that the shareholder benefit rules in ss. 15(1), 56(2) or 246(1) applied in addition to the FAPI rules.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(4) - Paragraph 128.1(4)(b) deemed disposition on emigration of individual’s shares of CFA 108

13 December 1994 Internal T.I. 9430770 - FOREIGN AFFILIATE - TAXATION YEAR

period for which accounts of CFA are normally made up treated as its taxation year

Where a corporation resident in Canada with a June 30 taxation year end owns a Singapore subsidiary that maintains a September 30 year end for commercial accounting purposes but is required under Singapore law to recognize its non-business income on a calendar-year basis, the s. 95(2)(b) income of the Singapore subsidiary will be computed for the October 1 to September 30 period. RC noted, having regard to the definition in s. 95(1) of "taxation year" that "the period for which the accounts of the affiliate are normally made up is from October 1 to September 30."


Ilia Korkh, Eivan Sulaiman, "Outbound Partnerships: FAPI in Unexpected Places", Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 10

Interposition of a partnership between a small stakeholder and a non-resident corp may generate FAPI (p. 10)

FAPI of a non-resident corporation may be included, in the income of a Canadian-resident person notwithstanding that the non-resident corporation may not, in fact, be a foreign affiliate or CFA of such person.

… [C]onsider a corporation resident in Canada (Canco) that has a 5 percent interest in a general partnership. The remaining partnership interest is held by an arm’s length non-resident corporation. The partnership holds all of the issued and outstanding shares of Forco, a non-resident corporation, and Forco’s income includes FAPI. For the purposes of computing its income under subsection 96(1), which includes the application of subsection 91(1), Forco is a CFA of the partnership. As a result, the FAPI of Forco must be included in the income of the partnership, and 5 percent of such FAPI must be allocated to Canco. …

Jonah Bidner, "An Individual's Direct Ownership of a CFA", Canadian Tax Focus, Vol. 6, No. 4, November 2016, p. 12

77% effective tax rate on property income subject to US (pp. 12-13)

Suppose that Forco, a foreign corporation (characterized as such on the basis of provisions such as article IV of the Canada-US treaty…)…earns $1,000 of property income, pays foreign tax at 50 percent, and pays out the remaining $500 as a dividend.

If A (a top-bracket Ontario-resident individual) owns Forco directly, the total tax payable is $767.65 ($500 foreign tax + $0 Canadian tax on FAPI + $267.65 Canadian tax on the dividend), for a tax rate of almost 77 percent on the initial $1,000 earned…The calculations are as follows:

  • A has a $1,000 FAPI inclusion… . However, the net taxable amount is $0 because this inclusion is fully offset by a $1,100 deduction for foreign accrual tax…
  • A has $500 of ordinary income from Forco because the dividend does not receive the dividend gross-up and tax credit. The subsection 91(5) deduction…is computed as the lesser of the dividend ($500) and, essentially, the amount of FAPI that has been taxed in Canada ($0)….

69.7% effective tax rate if flowed through a Canco (and deferral until Canco dividend) (p. 13)

Assume that A owns 100 percent of Canco, and Canco owns 100 percent of Forco. If the funds are to be reinvested by Canco, no Canadian tax arises, and the total tax payable is $500 of foreign tax…

If the funds are to be passed on to A as a dividend for reinvestment at the personal level (instead of the corporate level), the total tax burden is $696.70[:] $500 foreign tax + $196.70 Canadian tax...calculated as 39.34 percent of the eligible dividend of $500.

Kevin Duxbury, "Canadian-Owned US LLCs More Costly After the Fifth Protocol", Tax for the Owner-Manager, Vol. 9, No. 4, October 2009, p. 8.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 4 0

Pierre Bourgeois, "Canadian Taxation of Offshore Income: A Primer", 1999 Conference Report, c. 2.

Subsection 91(1.1)


Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016

Otherwise de minimis changes effectively are linked to another change not part of the series

The de minimis exception in s. 91(1.1)(b) does not apply to a large number of trivial SEP changes (e.g., where there is an employee stock option plan on the shares of the FA) if there is also a larger SEP change in the year, even if this does not occur as part of the same series of transactions.

Rule does not extend to individuals and trusts

Furthermore, the exception for situations where the acquisition or disposition resulting in a decrease in SEP for the taxpayer leads to a corresponding increase in SEP for one or more non-arm’s length taxpayers does not extend to such taxpayers who are Canadian individuals or trusts.

Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI", International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8

General potential triggering of stub year for controlled foreign affiliate (CFA) if disposition triggering change to surplus entitlement percentage (SEP) (p. 9)

[I]f there is an acquisition or disposition of shares of a foreign affiliate of the taxpayer that results in a change to the taxpayer's SEP in respect of the particular CFA, then there may be a deemed year end for the particular CFA at the "particular time" which is immediately before the acquisition or disposition….

No exclusion in s. 91(1.1)(b)(i) where different CFA’s with matching SEP changes or where increased SEP lands in NAL individual (p. 9)

[T]he first exception, under subparagraph 91(1.1)(b)(i), is where the decrease to the taxpayer's SEP in the particular CFA is matched by an increase to the SEP in the particular CFA of one or more taxpayers, each of which is a taxable Canadian corporation that does not deal at arm's length with the taxpayer immediately after the particular time. Two points[:]…First, the decrease and increase(s) must be in respect of the same particular CFA. Thus, if there is some sort of reorganization involving two particular CFAs and the taxpayer's SEP in one of them decreases but the taxpayer's (or a non-arm's length taxable Canadian corporation's) SEP in the other one increases, that does not fit within this exception even if the total amount of attributable FAPI remains unchanged. Moreover, this exception would apply only where the increased SEP lands in a non-arm's length taxable Canadian corporation - and thus would not apply where the other non-arm's length taxpayer is an individual or a trust or even a partnership, notwithstanding that the SEP decrease is to be "determined as if the taxpayer were a corporation resident in Canada"….

S. 91(1.1)(b)(iii) applicable if single disposition/acquisition (p. 10)

[T]he Explanatory Notes state that this exception [in s. 91(1.1)(b)(iii)] applies where the acquisition or disposition "is one of multiple in the year,…However, the statutory language does not seem to actually require multiple acquisitions or dispositions…

Melanie Huynh, Paul Barnicke, "September 2016 FA Proposals", Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 8

Thrust of new stub-period accrual rules if s. 91(1.1) exceptions do not apply (p. 8)

If the exceptions do not apply, the CFA has a deemed stub year-end in respect of the taxpayer and a corporation or a partnership that is connected to the taxpayer….This rule prevents the stub period FAPI from being included in the income of a connected person whose SEP [surplus entitlement percentage] in the CRA has increased.

Continued potential for double income inclusion (p. 9)

Because the deemed year-end extends only to connected corporations and partnerships, double income inclusion may still arise in certain cases. Assume that a Canco disposes of a CFA to a non-arm's-length Canadian individual who does not own the CFA before the transfer and who continues to own the CFA at the end of its normal year-end. In this case, the stub period FAPI is included twice: in the hands of both the Canco and the individual. Similar anomalies arise if the transferor is another individual instead of a Canco, or if the transferee is a trust, or if a partnership with non-corporate members is involved.

Nathan Boidman, "Canada Augments International Tax Rules", Tax Management International Journal, Vo. 43, No. 12, December 12, 2014, p. 759.

Previously no pick-up of FAPI if not a CFA at year end (p. 762)

One surprise in Bill C-43 is that it does not contain a substantial amendment proposed in the summer of 2013….

[F]API) of a "controlled foreign affiliate" (CFA) is attributed to the relevant Canadian resident only if there is CFA status vis-a-vis the Canadian at the end of the taxation year of the CFA….

Analogous U.S. rule (p. 762)

(The U.S. rule in converse circumstances is that pro rata portions of Subpart F income must be recognized unless the disposition occurs in the first 30 days of the CFC's taxable year and the sale is to a non-U.S. person; but for U.S. corporations that pay the same rate of the tax on capital gains and ordinary income, these effects may be neutral.) [fn 34: See Code §951(a). Where a corporation has capital losses that may only be offset against capital gains, the effects would seemingly not be neutral.]

Adoption of FAPI pick-up if disposition before year end (p.762)

An amendment proposed last summer [fn 35: Proposed §91(1.1) and §91(1.2).] would change the 38-year-old rule and adopt the U.S. approach by requiring a FAPI pick-up even if the CFA interest has been disposed of before year end. But this change should have no net effect where the disposed CFA is a U.S. corporation because the usual U.S. corporate tax rate would, pursuant to a de facto (§91(4)) foreign tax credit, eliminate any net Canadian tax on the attributed FAPI. That would preclude any upward basis adjustment (under §92 of the Act) for the Canadian shareholder and thus not affect the determination of the amount of gain upon the disposition.

But, as noted, the amendment is being reworked and is not in Bill C-43.

Subsection 91(1.2)


Monique Sami, "Further Refinements to Stub Period FAPI", International Tax (Wolters Kluwer CCH), October 2017, No. 96, p. 4

18 September 2017 proposals (“Current Proposals”) did not extend s. 91(1.2) to acquisition of shares of (existing) FA from NR (p. 9)

[N]o changes appear to have been made to the Current Proposals to address concerns where shares of an FA are acquired from a non-resident. As described in the example in the Joint Committee submission, a Canadian corporation that owns 10% of the shares of an FA and then acquires the other 90% of the shares of the FA from a non-resident person shortly before the last day of the FA's taxation year, will be required to include in its income 100% of the FAPI of the FA earned in the year. This result arises since neither the carve-out rule in paragraph 95(2)(f.1) would apply (since the affiliate is an FA prior to the acquisition) nor would subsection 91(1.2) be applicable (since the acquisition is from a non-resident corporation)….

Paul Barnicke, Melanie Huynh, "Revised Stub-Period FAPI", Canadian Tax Highlights, Vol. 25, No. 10, October 2017, p. 3

Since the writing of this article based on the September 8, 2017 draft legislation, "connected corporation" in s. 272.1(1.3) was replaced in the October 25, 2017 NWMM by "connected person" to address the quoted issue.

Potential double-taxation of stub-period FAPI where an arm’s length individual or trust has a participating percentage (PP) increase (p. 4)

If the stub year-end deeming rule applies and a taxpayer's FA has a stub year-end at a particular time, that year-end applies to all "connected corporations" and "connected partnerships" in respect of the taxpayer. A connected partnership is one in which either the taxpayer or a connected corporation is a member directly or indirectly through one or more partnerships. A connected corporation is defined as a non-arm's-length resident company or an arm's-length resident company (if the FA is the company's FA at the particular time and the triggering event results in an increase in the company's PP in the FA). The technical notes say that the concept of connected corporation now includes non-arm's-length corporations as described above, which makes unnecessary subsection 91(1.5) in the 2016 draft. However, subsection 91(1.5) in that draft applied to all taxpayers, not just corporations. Hence, under the 2017 draft, the same stub-period FAPI is now taxed twice—in a taxpayer that has a PP decrease, and in another arm's-length non-corporate taxpayer (such as an individual or a trust) that has a PP increase.

Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016

Recognition should be based on PP rather than SEP changes

The triggering event for a stub period under s. 91(1.2) should be a change in the participating percentage rather than in the surplus entitlement percentage. For example, all the income of the FA in question might be allocable for the year to preferred shares (i.e., the preferred shareholder’s PP is 100%) so that it would not be appropriate to trigger the rule based on a change in the year of the SEP of a holder of the FA’s common shares.

Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI", International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8

Stub period for CFA applies re NAL Cdn corps (p. 10)

[T]his deemed [s. 91(1.2)] year end applies… also in respect of each corporation or partnership that is "connected" to the particular taxpayer…[including, under s. 91(1.3)] a corporation… if, at or immediately after the particular time, it is resident in Canada and does not deal at arm's length with the taxpayer; and… a partnership… if, at or immediately after the particular time, the particular taxpayer or a non-arm's length corporation resident in Canada is, directly or indirectly through one or more partnerships, a member of the partnership.

Problematic exclusion of arm’s length taxpayers where s. 95(2)(f.1) carve-out is inapplicable (p. 11)

[T]here is no "stub-period end time" with respect to arm's length taxpayers, which can be problematic if the "carve-out" rule in paragraph 95(2)(f.1) is not applicable to them, as that could result in double FAPI attribution.

Paul L. Barnicke, Melanie Huynh, "Stub Period FAPI on Disposition", Canadian Tax Highlights, Vol. 21, No. 8, p. 6

Deemed year-end for CFA whose SEP increases? (p. 6)

The proposal's charging provision operates whenever – vis-à-vis a particular CFA – there is a decrease in a taxpayer's surplus entitlement percentage (SEP), calculated as if the taxpayer were a Canco. Immediately before the time of the decrease, the CFA has a deemed taxation year-end for the purposes of section 91, and thus the disposing taxpayer must pick up its share of FAPI in the stub period. The deemed year-end rule does not apply if another connected Canco has an equal and offsetting SEP increase vis-à-vis the CFA. It is not clear whether the CFA of a Canco whose SEP increases (the acquiring taxpayer) also has a deemed year-end if that Canco is not connected.

Narrowness of relieving concept of "connected" (pp. 6-7)

The relieving definition of "connected" in the proposal is a concern because it is much narrower than the relieving definition of "specified person or partnership" in the companion provision in paragraph 95(2)(f.1), which uses the concept of non-arm's length. As a result, more than 100 percent of the FAPI in a stub period may be caught in the Canadian tax net, because the disposing and acquiring taxpayers may be related but not connected (as defined for the two companion provisions). Thus, if the CFA does not have a deemed year-end vis-à-vis the acquiring taxpayer because it is related to the disposing taxpayer, the acquiring taxpayer must pick up current-year FAPI in the year of acquisition and before the SEP change (paragraph 95(2)(f.1)). If the disposing taxpayer is not connected with the acquiring taxpayer, the disposing taxpayer must also pick up the same FAPI (proposed subsection 91(1.1)).

Edward A. Heakes, "Another Wave of Foreign Affiliate Proposals", International Tax Planning, Volume XVIII, No. 4, 2013, p. 1275

Narrowness of connected definition (p. 1275)

[A]ssume that A is a non-resident that owns 100% of the shares of two first tier Canadian holding companies (B and C) and that B and C in turn each own 50% of the shares of another Canadian corporation (D), which owns 100% of the shares of a CFA (F). If D transfers the shares of F to B and C, the exception does not appear to apply as neither B nor C is connected with D under the current draft.

Subsection 91(1.4)


Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016

Excluded property test not appropriate

It would be preferable for the rules in ss. 91(1.4) and (1.5) to apply by default, with taxpayers being able to elect to have these rules not apply. Furthermore, it is not apparent why, where there is a disposition of the particular FA’s shares by a CFA of the taxpayer, the shares must be excluded property immediately thereafter.

Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI", International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8

Need not be two dispositions for s. 91(1.4) to apply, and excluded property condition may be meaningless (p. 11)

Subsection 91(1.4) is designed to address among other things, duplicative FAPI attribution in the context of a multi-tiered structure, where FAPI may arise at the level of a FAPI-earning CFA, but also at the level of a higher-tier CFA because of a disposition of the lower-tier FAPI earning CFA. The Explanatory Notes include an example [to this effect.]…

[A]lthough [this] example…refers to a subsequent disposition of a lower-tier affiliate, it is not a condition of the rule that there be two dispositions. [fn 21: It should also be noted that subparagraph 91(1.4)(b)(ii) refers to the disposed of shares not being excluded property immediately after…the time the shares are disposed of. At this time, the shares arguably would not be property of the other controlled foreign affiliate so they could not be excluded property to it at that time, which makes this condition meaningless. …]

NAL ambiguity could invalidate s. 91(1.4) election (p. 12)

…[A]mbiguity in relation to factual non-arm's length relationships could result in an invalid election.

Subsection 91(1.5)


Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016

Exclusion of arm’s length purchase from NR inappropriate if carve-out rule unavailable

The unavailability of s. 91(1.5) (allowing a purchaser to have a stub period year end) to an arm’s length purchaser from a non-resident can generate an inappropriate result where the s. 95(2)(f.1) carve-out rule is unavailable to the purchaser (in respect of whom the FA might already have been an FA).

Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI", International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8

Potential relieving effect of s. 91(1.5) (p. 12)

Subsection 91(1.5) is designed to address the interaction of subsection 91(1.2) and the "carve-out" rule in paragraph 95(2)(f.1) where the latter is not applicable (mainly) in relation to an arm's length acquisition of an interest in a particular CFA is already a foreign affiliate of the taxpayer (or other relevant person). …

[I]t is not clear why this measure is elective, since it is difficult to see a circumstance where this result would not be desirable from the perspective of the particular taxpayer,…

[T]his measure may, to some extent, be helpful in non-arm's length situations involving transfers (or other acquisitions and dispositions) involving corporations and individuals or trusts. As noted above, there is no exception (or automatic application of subsection 91(1.2)) where an SEP decrease to a corporation is matched by an SEP increase to a non-arm's length individual or trust, but this measure could perhaps at least eliminate the duplication of FAPI attribution.

Subsection 91(4) - Amounts deductible in respect of foreign taxes

See Also

Burton v Commissioner of Taxation, [2019] FCAFC 141

credit “in respect of” income only included the taxable ½ of capital gain

The taxpayer was an Australian resident who was taxed at the 15% long-term U.S. capital gains rate on his gains on disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it.

The Australian foreign tax credit (FITO) provision (s. 770-10) provided:

An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

In affirming the decision below to confirm the Commissioner’s denial of a FITO for half of the U.S. tax, Logan J stated (at para. 86):

As a matter of ordinary language flowing from the text of s 770-10 … it is only the net capital gain which is … included in Mr Burton’s assessable income. … There is no contextual warrant for construing “included in” as extending to an amount which is used for computation of an amount that is included in assessable income.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 “income” was the full U.S. gain, but FTC to be calculated based on Australian (1/2 recognition) principles 581

Administrative Policy

25 March 2004 Internal T.I. 2002-0134201I7 - Foreign accrual tax-timing of Deduction

relevance of 5-year look-back rule

Respecting the potential relevance of the phrase "or for any of the 5 immediately preceding years" in the preamble and "the portion of the foreign accrual tax applicable to the income amount that was not deductible under this subsection in any previous year" in s. 91(4)(a)(i), CRA stated:

First, where foreign tax has been paid in an earlier year, but the income that it related to was not recognized as Fapi until a later year, such tax would become FAT in the year the Fapi was reported and the deduction would be taken in that year. It would not have been deductible in any previous year notwithstanding that the tax had been paid in a previous year.

Second, FAT that is applicable to an amount that has been included in Fapi in a previous year can occur in a number of situations where the foreign tax liability arises in a year subsequent to the year the Fapi was included in income under 91(1). For example, withholding tax in respect of a dividend paid out of income that was included in Fapi will only be recognized as FAT at the time the withholding tax liability arises. Such tax is treated FAT at that time and such FAT was not deductible in a previous year (there having been no obligation under the foreign tax law to pay such FAT). In another example, where Fapi is included under 91(1) in a particular year, but the income for foreign purposes is recognized over a period of years because of a reserve allowed under the foreign tax law, so long as it was eventually paid the FAT would be deductible in respect of the year the affiliate became obligated to pay it.


Marc André Gaudreau Duval, Michael N. Kandev, "Foreign Affiliate Issues in Troubled Times", International Tax (Wolters Kluwer CCH), No. 112, June 2020, p. 1

COVID-19 related deferral of foreign taxes may eliminate current FAT deduction (p. 5)

Assuming that an amount is not recognized as FAT until it is paid, the deferral of tax payments may give rise to unexpected surprises to Canadian corporations that are generally not paying any Canadian taxes on the FAPI incurred by its CFA. … [T]he result of deferring the payment of the foreign tax is that the FAT deduction will be reduced by four times the amount so deferred, thus potentially give rise to Canadian taxes.

Tim Barrett, Kevin Duxbury, "Corporate Integration: Outbound Structuring in the United States After Tax Reform", 2018 Conference Report (Canadian Tax Foundation), 18:1-76

LLC-related FAT issues (pp. 18:24–25)

US tax paid by a Canadian member on an LLC’s income is not FAT for the purposes of subsection 91(4)….Accordingly, Canadian members of an LLC cannot claim a subsection 91(4) deduction for an income inclusion in respect of an interest in an LLC. …

[A] Canadian taxpayer that indirectly holds an interest in an LLC through a shareholder affiliate would be entitled to a deduction under 91(4) for tax paid by the shareholder affiliate in respect of FAPI earned by the LLC.

Although resident members cannot claim FAT deductions for FAPI earned by an LLC, individual members may claim a subsection 20(11) deduction and FTC for US tax paid in respect of FAPI included in income under subsection 91(1). [fn 139: 2013-0480321C6] Any excess US taxes paid by the individual member in respect of the FAPI income (that is, not deducted under subsection 20(11) or used as an FTC) may be deducted from income pursuant to subsection 20(12).

Paul Dhesi, Korinna Fehrmann, "Integration Across Borders", Canadian Tax Journal, (2015) 63:4, 1049-72

Inclusion of FAPI in aggregate investment income ("AII") (p.1052)

[F]API, as income earned from a share, should be included in a CCPC's AII in the year earned… . [T]he general corporate income tax rate in British Columbia for 2015 is 26 percent while the corporate income tax rate applicable to AII is 45.7 percent. ...

Potential advantage of earning ordinary income as FAPI (p. 1054)

Consider a CCPC subject to tax in British Columbia ("BCco") that acquires a royalty interest. The royalty interest generates $100,000 of income in 2015. If the royalty interest is owned directly by BCco, the resulting income should be subject to the combined corporate tax rate for investment income of 45.7 percent.

...[I]f Forsub is established in a jurisdiction that levies an overall effective tax rate of 25 percent on the royalty income…[t]he FAPI inclusion to BCco should still be $100,000. But because Forsub pays $25,000 in foreign tax in respect of the royalty income, BCco should be entitled to an offsetting FAT deduction of $100,000 ($25,000 multiplied by the RTF of 4). As a result, BCco will have nil net FAPI and will not be subject to Canadian corporate tax on the royalty income despite paying only $25,000 in foreign taxes….

Michael G. Bronstetter, Douglas R. Christie, "The Fickle Fingers of FAT: An Analysis of Foreign Accrual Tax", International Tax Planning, 2003 Canadian Tax Journal, No. 3, p. 1377.

Melanie Huynh, Eric Lockwood, "Foreign Accrual Property Income: A Practical Perspective", International Tax Planning, 2000 Canadian Tax Journal, Vol. 48, No. 3, p. 752.

Subsection 91(4.1) - Denial of foreign accrual tax


Ian Bradley, Ken J. Buttenham, "The New Foreign Tax Credit Generator Rules", International Tax Planning, Volume XVIII, No. 2, 2012, p. 1228, at 1231

The FAT [foreign accrual tax] or UFT [underlying foreign tax] denied under the FTCG [foreign tax credit generator] Rules is not limited to the amount of foreign income or profits taxes paid in respect of FAPI [foreign accrual property income]. In certain circumstances, the FTCG Rules could deny credit for Canadian taxes paid. FAT and UFT include income or profits tax paid by a foreign affiliate to the government of any country, including Canada. [fn. 11: See the definitions of "foreign accrual tax" in subsection 95(1) of the Act and "underlying foreign tax" in subsection 5907(1) of the Regulations, as well as Canada Revenue Agency Documents 2000-0058637 (February 5, 2002) and Canada Revenue Agency Document 2007-0247551E5 (June 27, 2008).] For example, consider a situation in which a foreign affiliate lends money to a related Canadian resident. The interest paid to the affiliate is subject to Canadian non-resident withholding tax at a rate of 25%. Absent the FTCG Rules, this withholding tax borne by the foreign affiliate should generally be included in the affiliate's FAT and UFT. However, if the FTCG Rules apply to a taxpayer in respect of the affiliate, this withholding tax will be ignored in computing the taxpayer's FAT and UFT deductions, even though it represents actual Canadian taxes paid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 91 - Subsection 91(4.7) 232

Angelo Nikolakakis, "Foreign Tax Credit Generators - Revised Proposals, Continuing Concerns", CCH International Tax, Nos. 54-55, December, 2010, p. 19.

Subsection 91(4.4) - Series of transactions


Ian Bradley, Ken J. Buttenham, "The New Foreign Tax Credit Generator Rules", International Tax Planning, Volume XVIII, No. 2, 2012, p. 1228, at 1230

After describing the cross-chain funding rule in draft s. 91(4.1) and Reg. 5907(1.06), they provided this example:

For example, consider a taxpayer that has two foreign affiliates, FA 1 and FA 2. The taxpayer directly owns 100% of the shares of each affiliate (i.e., there is no cross-ownership between FA 1 and FA2). Assume the taxpayer's investment in FA 1 satisfies a hybrid condition. The FTCG Rules will apply to the taxpayer in respect of FA 1, as the taxpayer is a specified owner and FA 1 is a pertinent person or partnership. The rules will not apply to FA 2, because FA 1 is not a pertinent person or partnership of FA 2. However, if FA 1 made a non-interest-bearing loan to FA 2, the cross-chain funding rule would deem FA 1 to be a pertinent person or partnership of FA 2. The taxpayer's investment in FA 2 would then be caught by the FTCG Rules. The cross-chain funding rule would not apply if the loan from FA 1 to FA 2 had arm's length terms and conditions.

Subsection 91(4.5) - Exception — hybrid entities


Philippe Montillaud, Grant J. Russell, "Foreign Accrual Tax and Flow-through Entities", International Tax Planning, Volume XVIII, No. 4, 2013, p. 1280

No relief where PPOP is the hybrid (p. 1281)

Subsection 91(4.5) does not provide relief, however, where the PPOP itself is the hybrid entity. For example, consider the situation where a taxpayer has the following structure:

  1. Pubco, a Canadian corporation, owns all issued and outstanding shares of U.S. Holdco, a U.S. C corporation.
  2. U.S. Holdco owns all issued and outstanding units of U.S. LLC.
  3. U.S. Holdco earns FAPI in respect of which it incurs U.S. tax.

In this example, the U.S. LLC is disregarded under U.S. law and therefore, U.S. Holdco does not own the shares of U.S. LLC that it owns for purposes of Canadian law. Accordingly, and stepping through the language of the provision, subsection 91(4.1) will deny Pubco its FAT deduction since U.S. Holdco, a "specified owner" in respect of the "taxpayer" Pubco, is considered under U.S. law to own less than all of the shares of U.S. LLC, a "pertinent person" in respect of the "affiliate" U.S. Holdco, that it is considered to own for purposes of the Act….

Ian Bradley, Ken J. Buttenham, "The New Foreign Tax Credit Generator Rules", International Tax Planning, Volume XVIII, No. 2, 2012, p. 1228, 1231-1232

Unlike the August 2010 Proposals, the exception for the hybrid entities in the current FTCG [foreign tax credit generator] Rules only applies to the investor entity, not to the entity which receives the investment. Thus, if an entity is treated as a corporation under Canadian tax law but is treated as an entity without share capital under the relevant foreign tax law, an investment in this entity could be considered a hybrid investment that is subject to the FTCG Rules.…When the specified owner concept was introduced in the current rules, Finance may have negledcted to extend the hybrid entity exception to cover both specified owners and the new pertinent person or partnership concept.

Paul L. Barnicke, Melanie Huynh, "Losing the FAT", Volume 21, Number 2, February 2013, 13 at 14

…FAT denial does not arise in situations where the specified owner does not own the same number of FA shares in the PPOP [pertinent person or partnership] solely because it is disregarded for foreign (such as US) tax purposes. However, the FTCG proposals deny all FAT in an FA chain if the PPOP is the hybrid entity. Assume, for example, that USco wholly owns a US pass through LLC. Under US tax law, the LLC does not exist, and therefore USco does not own all of the shares that it owns for Canadian tax purposes. Thus, all FAT in this FA ownership chain is denied. (Finance is aware of this anomaly and may be sympathetic to a legislative amendment.) An additional concern arises for an entity (tested as a PPOP) that under foreign tax law does not issue shares (such as a company limited by guarantee) and other non-share entities (such as a limitada or a GmbH that has percentage ownerships or quotas in lieu of actual shares). [emphasis added]

Subsection 91(4.6)

Paragraph 91(4.6)(b)


Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016

Safe harbour does not extend to upper tier hybrid partnerships

Similarly to draft s. 91(4.5), the exceptions in ss. 91(4.6)(b) and 126(4.12)(b) also should be revised to encompass any partnership in the direct ownership chain (rather than just the operating partnership) that is treated as a corporation under the relevant foreign law.

Subsection 91(4.7) - Deemed ownership

Administrative Policy

26 April 2017 IFA Roundtable Q. 5, 2017-0691121C6 - Foreign tax credit Brazilian interest on equity

s. 91(4.7) applies year-by-year based on actual dividend deductibility

The test under s. 91(4.1) is deemed by s. 91(4.7) to be met if, under relevant foreign law, dividends on shares held by specified owner are treated as interest or another form of deductible payment. Under Brazilian law, corporations can choose to make tax deductible distributions (“interest on equity” or IOE) to shareholders. Do such distributions come within s. 91(4.7)?

CRA indicated that the conditions for the application of s. 91(4.7) are met in a taxation year of a Brazilian foreign affiliate if, at any time in that year, dividends paid to a specified owner (no matter the amount) are deductible by the paying corporation under Brazilian tax law by virtue of an IOE election. Thus, the application of s. 91(4.7) would result in the denial under s. 91(4.1) of FAT applicable to foreign accrual property income of that Brazilian foreign affiliate for that year of the dividend. If the Brazilian affiliate had a chain of other foreign affiliates under it, that could also by reason of the chain rules result in the denial of FAT in respect of FAPI for those underlying subsidiaries – or for subsidiaries up above, as well.


Ian Bradley, Ken J. Buttenham, "The New Foreign Tax Credit Generator Rules", International Tax Planning, Volume XVIII, No. 2, 2012, p. 1228, at 1231

After referring to the expansion of the income test in s. 91(4.1)(a) by virtue of the deductible dividend test in s. 91(4.7), they stated:

… On this basis, the income test could apply to investments that may not be considered hybrid instruments in the conventional sense. For example, dividends paid on certain Australian preferred shares are deductible by the payer, but are still considered dividends for some Australian tax purposes. These types of investments appear to be the subject of the income test addition to the FTCG Rules.

The income test refers to dividends or similar amounts that are treated as "interest or another form of deductible payment" under the relevant foreign tax law. It is not clear whether this rule applies only when amounts are actually paid and deducted, or if it applies whenever an entity has the ability to make deductible distributions in respect of shares.…

For example, Brazilian law allows incorporated companies to pay pro rata distributions referred to as "interest on equity." These distributions generally are deductible under Brazilian tax law, up to a maximum amount based on the company's "equity" and certain prescribed interest rates. These payments are deductible when declared, but a company can choose not to claim the deduction. Based on the words, the income test could apply when a Brazilian company makes an interest on equity payment, even if it chooses not to deduct this payment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 91 - Subsection 91(4.1) 205

Paul L. Barnicke, Melanie Huynh, "Losing the FAT", Canadian Tax Highlights,Volume 21, Number 2, February 2013, 13 at 14.

Under some foreign tax laws, dividends or similar amounts in respect of an FA are either tax-deductible interest payments or other deductible payments; in that case, the specified owner of those shares is deemed to own less than all of the shares of that PPOP [pertinent person or partnership]. This situation may occur, for example, if a taxpayer or an FA in an FA chain owns redeemable preferred shares of an Australian corporation; those shares may be treated like debt under Australian tax law. The perceived mischief may arise because the dividend paid is tax-deductible in Australia but a receipt is exempt surplus for Canadian tax purposes. Unfortunately, this same provision may catch most commercial conduit entities that are FAs, such as US REITs, REMICs, RICs, and co-ops. Brazilian interest-on-equity shares and UK LLPs may also be adversely affected. Belgian and Italian notional interest deduction regimes are generally considered not to be vulnerable.

Subsection 91(5) - Amounts deductible in respect of dividends received

Administrative Policy

18 July 2018 Internal T.I. 2018-0766441I7 - Article XXIX(5) and 91(5)

revocation of a Treaty S Corp. agreement with CASD resulted in double taxation of the S Corp income when now dividended to Canada

An individual who was a Canadian resident and a US citizen and who owned voting shares of an S Corporation paid US taxes on its income. During the period that he and the Canadian Competent Authority had an Agreement under Art. XXIX(5) of the Canada-US Treaty in effect (apparently, for 2017), he included his share of the S Corporation’s income as FAPI, claimed a credit under s. 126 for the US taxes, and added such FAPI to the ACB of his shares. He did not receive any distribution in 2017. The Canadian Resident then revoked S Corporation’s status as a fiscally transparent entity for US tax purposes, so that the Agreement thereupon ceased to be effective.

S Corporation then made a distribution (the “dividend”) of income that previously had been included in his income as FAPI and that now was included in his income under s. 90(1).

The Directorate indicated that where S Corporation was a CFA of the Canadian resident at all times, he could take a s. 91(5) deduction of the dividend paid after the Agreement invalidation, with a corresponding reduction to the ACB of his shares.

However, where S Corporation was not a FA at the time the dividend was paid, no s. 91(5) deduction would be available (with no corresponding ACB reduction) because in such absence of FA status, Reg. 5900(3) would not deem the dividend to come out of taxable surplus.

The Directorate noted that it could be argued that s. 248(28) would apply to exclude the dividend from his income given that “both the dividend and FAPI arise from the same source, namely the shares of S Corporation .” However, the Directorate stated:

[T]he better view … is that the dividend income and FAPI inclusion are not the same amount …

[T]he dividend income is a cash distribution on the shares of S Corporation while the FAPI is a notional allocation of the income of S Corporation deemed to be FAPI on its shares of S Corporation … [so that] the dividend income and FAPI are separate amounts of a different nature … [which] would preclude the application of subsection 248(28).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) S Corp income included as FAPI by virtue of Treaty S Corp. agreement was a separate amount for s. 248(28) purposes from the subsequent dividending of that income 335
Tax Topics - Treaties - Income Tax Conventions - Article 29 agreement with CASD terminated when S Corp. ceased to be fiscally transparent 207

16 May 2018 IFA Roundtable Q. 3, 2018-0749171C6 - Interaction s.91(5) s.93.1(2)(d)(i)

appplication of s. 91(5) to LP shareholder of FA

Canco (and its Canadian sub) hold LP, which received a $3,000 dividend from a wholly-owned foreign affiliate (FA). Although the dividend came out of FA’s exempt surplus of $3,000, it was deemed insofar as LP was concerned to be deductible as to $2,000 under s. 91(5) and Reg. 5900(3) respecting previously earned foreign accrual property income. Taking into account $300 of interest expense on acquisition debt of LP, the income of Canco (ignoring any other sources and rounding its partnership interest up to 100%) is $700 ($3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 93.1 - Subsection 93.1(2) - Paragraph 93.1(2)(d) - Subparagraph 93.1(2)(d)(i) s. 93.1(2)(d)(i) limit does not reflect acquisition-debt interest deduction of LP 418
Tax Topics - Income Tax Regulations - Regulation 5900 - Subsection 5900(3) corporate-owned LP treated transparently to avoid a surplus anomaly re s. 91(5) dividend 226

16 November 2015 Internal T.I. 2015-0598491I7 - 91(5) & FAPI included per “old” 94(1)(c)(i)(C)

upward ACB adjustment to the CFA occurring as a result of recognized FAPI under the old s. 94(1) rules represented basis that could be distributed while the trust was subject to the new s. 94(3) trust rules

A non-resident discretionary trust (“NRT”) owned all the shares of CFA. Amounts in respect of CFA’s foreign accrual property income had to be included in NRT’s 2002, 2004 and 2006 taxable income by virtue of “old” s. 94(1)(c)(i)(C) (“FAPI-Inclusions”).

In its 2007 taxation year, which was its final taxation year, NRT became subject to “new” s. 94, and included a dividend received from CFA in its income. Would a s. 91(5) deduction be available to NRT for such dividend, so as to take into account the FAPI-Inclusions? CRA responded:

[T]he FAPI-Inclusions trigger permanent adjustments to the ACB of the shares of CFA [under s. 92(1) and s. 53(1)(d)], which adjustments have to be considered in order to determine any further Canadian tax consequences to NRT in respect of its shares of CFA.

…[T]he dividend received by NRT from CFA during its final taxation year, while NRT is subject to “new” subsection 94(3), is prescribed to have been paid out of CFA’s taxable surplus by virtue of [Reg.] 5900(3) of the Income Tax Regulations. Thus, considering that subsection 91(5) relies on the prior application of section 92 in respect of the shares of CFA,… NRT would generally be entitled to a deduction under subsection 91(5) in computing its income for that year… .[Furthermore] the general purpose of subsection 91(5)… is to ensure that… foreign accrual property income [is] not taxed a second time upon distribution of the related income.

27 June 2008 External T.I. 2007-0247551E5 - FAPI and Part XIII Tax

s. 91(5) deduction eliminated net FAPI inclusion to CFA members of foreign partnership receiving foreign dividends from partnership subsidiary

A partnership (FP) between two CFAs of Canco received dividends (the “Foreign Dividends”) from a non-resident subsidiary of FP (NRco) and on-paid those dividends to its two CFA members. CRA stated that since NRco was not a foreign affiliate of Canco for FAPI purposes and NRco instead was a CFA of FP for FAPI purposes, the dividends from NRco were not excluded under the A - para. (b) FAPI exclusion. However, FP was entitled to an offsetting deduction under s. 91(5) and Reg. 5900(3). Furthermore, there was “no net dividend income to CFA1 and CFA2 with respect to the Foreign Dividends after the subsection 91(5) deduction by FP.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 DRUPA partnership 38
Tax Topics - Income Tax Regulations - Regulation 5900 - Subsection 5900(3) partnership between 2 CFAs was a Cdn-resident person for s. 91(5) purposes 68
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Property Income - A - Paragraph (b) FA dividends received by NR partnership between 2 CFAs (FP) not excluded from FAPI, but deduction under s. 91(5)/ Reg. 5900(3) to FP 298
Tax Topics - Income Tax Act - Section 92 - Subsection 92(1) - Paragraph 92(1)(a) double ACB recognition of FAPI at partnership level and at level of Canco shareholder of CFA partners 230


Tim Barrett, Kevin Duxbury, "Corporate Integration: Outbound Structuring in the United States After Tax Reform", 2018 Conference Report (Canadian Tax Foundation), 18:1-76

Current s. 91(5) deduction for FAPI included in individual LLC member’s income as the dividend payment (p. 18:27)

When an LLC pays a dividend to an individual member, the member will be entitled to a deduction under subsection 91(5) for FAPI included in computing the member’s income on a “share” of the LLC. Although there is arguably a timing issue with respect to taking a subsection 91(5) deduction for FAPI included in the member’s income in the same taxation year as the dividend, the CRA’s longstanding administrative practice is to permit the deduction. [fn 142: 59693] Because an individual member can take deductions and credits for US tax paid in respect of FAPI allocated from an LLC, the individual member is entitled to partial credit for US tax in the year of the FAPI inclusion, and to a full deduction when the FAPI is repatriated. …

Double taxation for corporate LLC members until dividend (p. 18:27)

[U]nlike individual members, corporate members are effectively subject to double taxation on FAPI inclusions until the income is repatriated. In some situations, this could result in permanent double taxation if the corporate member cannot use both the subsection 91(5) and paragraph 113(1)(c) deductions in the same year, or otherwise use the resulting NOL.

Bradley, "Foreign Affiliates: A Technical Update", 1990 Conference Report, c. 43

Deficiencies in s. 91(5) (pp. 43:7-43:8):

  • No recognition is provided for FAPI that was taxed in respect of a share while the share was owned by a related Canadian resident
  • If shares of a foreign affiliate are exchanged in the course of a tax rollover transaction (for example, a subsection 85.1(3) share exchange or a subsection 87(8) foreign merger), there is no "substituted property" rule whereby recognition for the previously taxed FAPI can be transferred to the new shares acquired on the exchange.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 93 - Subsection 93(1) 0

Paragraph 91(5)(b)

Administrative Policy

5 October 2001 External T.I. 2001-0093345 F - Déduction prévue à 91(5)

recognition of s. 92(1)(a) increase lost on s. 85.1(3) exchange

Parent transfers all of its shares of CFA1, which has earned FAPI, under s. 85.1(3) to newly-incorporated CFA2 in exchange for shares of CFA2. CFA1 immediately pays a dividend to CFA2, which pays a dividend to Parent. CRA stated:

PARENT would … not be eligible for a deduction under subsection 91(5) … with respect to the dividend received from CFA2, given that the ACB of the CFA2 shares for PARENT was not subject to any adjustment under paragraph 92(1)(a) … .

4 September 1990 Ruling 59693 F - Amounts Deductible in Respect of Dividends Received

s. 92(1)(a) ACB bump for current year’s FAPI is treated for s. 91(5)(b)(i) purposes as occurring immediately before a dividend paid in that year out of such FAPI
implicitly confirmed by 2007-0247551E5

F, a controlled foreign affiliate of C, a taxable Canadian corporation, F earns foreign accrual property income ("FAPI") during its 1990 taxation year and, before the end of that year, pays a dividend to C out of its taxable surplus computed (pursuant to Reg. 5901(2)) as of the end of its 1990 taxation year (which falls within C's 1990 taxation year.)

In finding that the addition for the 1990 FAPI under s. 92(1)(a) occurred “before the dividend” for s. 91(5)(b)(i) purposes, the Directorate stated:

Since the taxation year referred to in [s. 92(1)(a)] is that of the taxpayer resident in Canada, it is our view that in retroactively computing the ACB of a share of a foreign affiliate held by that taxpayer as at any particular time during that taxation year, (including a point in time before the end of the taxation year of the foreign affiliate), an amount equal to the amount which by reason of subsection 91(1) of the Act is required to be included in computing income of the taxpayer in respect of such share for the year, would be added. Accordingly, in the circumstances you have described, in computing the deduction under subsection 91(5) available to C in respect of the dividend from F, the subparagraph 95(1)(b)(i) amount at a time immediately before the dividend would include the amount required to be included in income in respect of the shares of F by reason of subsection 91(1) in computing C's income for the 1990 taxation year.