Section 92

Subsection 92(1) - Adjusted cost base of share of foreign affiliate

Paragraph 92(1)(a)

Administrative Policy

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

double ACB recognition of FAPI at partnership level and at level of Canco shareholder of CFA partners

Two wholly-owned U.S.-resident subsidiaries of Canco (CFA1 and CFA2) carry on a U.S. active business through a U.S. general partnership (FP) which, in turn, holds NRCo (U.S.-resident and owning investment property) and Holdco (a taxable Canadian corporation). Periodically, NRco and Holdco pay cash dividends to FP ("Foreign Dividends" and “Canadian Dividends”), which are then distributed by FP to CFA1 and CFA2. All entities have calendar year ends.

After noting that NRCo was a foreign affiliate of Canco for s. 113 purposes, but instead of FP for s. 91 purposes, CRA stated:

[A]ny FAPI of NRco would be included in the income of FP by virtue of subsection 91(1) … and would be treated as FAPI of CFA1 and CFA2 vis-a-vis their partnership interest in FP and such FAPI of CFA1 and CFA2 would be included in the income of Canco by virtue of subsection 91(1) .. . Such income inclusions in these entities would respectively increase the cost base of the shares of NRco owned by FP by virtue of paragraphs 53(1)(d) and 92(1)(a) …, the cost base to CFA1 and CFA2 of their respective partnership interest in FP by virtue of paragraph 95(2)(j) … and [Reg.] 5907(12)(a)(ii) [now Reg. 5908(10)], and the cost base to Canco of the shares of CFA1 and CFA2 by virtue of paragraphs 53(1)(d) and 92(1)(a) … .

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 91 - Subsection 91(5) s. 91(5) deduction eliminated net FAPI inclusion to CFA members of foreign partnership receiving foreign dividends from partnership subsidiary 107

4 September 1990 External T.I. 5-9693

ACB addition includes subsequently earned FAPI for the year

F, a controlled foreign affiliate of C, a taxable Canadian corporation earned foreign accrual property income ("FAPI") in its 1990 taxation year but, before the end of that year, paid a dividend to C, which was deemed to be paid out of its taxable surplus as of the end of its 1990 taxation year pursuant to Reg. 5901(2). CRA stated:

Since the taxation year referred to in the [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.


Allan Lanthier, "FAPI or Taxable Surplus Dividend", Canadian Tax Highlights, Vol. 23, No. 2, February 2015, p. 4.

Dispute as to whether FA earns ABI or FAPI (p. 4)

Assume that Canco owns CFA and that the relevant years are all before 2012. In year 1, CFA earns income of $1,000; there is no foreign tax. CFA pays a dividend of $1,000 to Canco, either in the year in which the income is earned (after the first 90 days) or at any time in any subsequent year. Canco is of the view that CFA's earnings are income from an active business and exempt surplus, and the CRA, is of the view that the earnings are FAPI and taxable surplus….

Deletion of "required to be" from s. 92(1)(a) (pp. 4-5)

[T}he wording in respect of the ACB addition mandated by paragraph 92(l)(a) was amended from "any amount required to be included ... by reason of subsection 91(1) … in computing the taxpayer's income" to "any amount included … under subsection 91(1) ... in computing the taxpayer's income."…

Distinction between "required to be included" and (factually) "included" (p. 5)

The Act distinguishes between amounts "required to "be included" and amounts "included" in a number of provisions. In Quigley (96 DTC 1057 (TCC), cited in Skinner, 2009 TCC 269), the TCC referred to a similar amendment in the domestic shareholder loan and repayment provisions: "The reason for the amendment is obvious as it was arguable that a deduction would result from repayment even if there were no prior inclusion."…

Effect: statute-barring does not start running until FAPI is distributed (p.5)

[U]nder the amended legislation, if year 1 is still open to assessment, the CRA can reassess and include FAPI in Canco's income under subsection 91(1) as the Act requires. Alternatively, the CRA can ignore the mandatory FAPI inclusion and simply not assess a FAPI inclusion. The CRA can instead assess the year or years in which CFA pays dividends, and indirectly tax the FAPI by denying the section 113 deduction and assessing the dividend as having been paid out of taxable surplus with no offsetting relief under subsection 91(5): FAPI was not "included" in Canco's income (according to Skinner, as determined by the CRA's final assessment for the year), and thus there was no ACB addition under amended paragraph 92(l)(a). The dividend from CFA to Canco is a transaction that gives rise to the additional, three-year reassessment period, and so the CRA can now circumvent the normal reassessment period for the assessmentof FAPI by taxing it as part of a taxable surplus dividend….

Subsection 92(4)


Ben Cen, "Planning for FA Distributions Paid Through a Partnership", Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 6

Addition under s. 92(4) of proceeds on partnership interest disposition where previous s. 113(1)(d) deduction, even where a rollover transaction (p.6)

A corporation resident in Canada (CRIC) may hold shares of a foreign affiliate (FA) either directly or through a partnership. … [I]f the CRIC disposes of its interest in the partnership, subsection 92(4) may add an amount to the proceeds of disposition if, before that time, the FA paid a dividend to the partnership out of its pre-acquisition surplus (PAS) in respect of which the CRIC claimed a paragraph 113(1)(d) deduction. Fortunately, the qualifying return of capital (QROC) election may be used to avoid this anomaly if the FA operates in a jurisdiction in which the relevant corporate law allows for a return of capital.

Avoidance of s. 92(4) subsequent consequences by making QROC distribution (p. 7)

Since a QROC does not result in income to the partnership [“P”] (or its partners), a paragraph 113(1)(d) deduction is not relevant. There is an immediate reduction [by the amount of the distribution, say] of $10 in P's ACB in the shares of FA pursuant to subclause 53(2)(b)(i)(B)(II). Further, when P distributes the $10, CRIC's ACB in the partnership interest is reduced by $10 pursuant to subparagraph 53(2)(c)(v). CRIC may then undertake internal rollover transactions without subsection 92(4) affecting the tax results. However, for this solution to be applicable, the distribution must be a reduction of the paid-up capital of the shares of FA under the corporate law of the jurisdiction where FA is located.

Use of QROC distributions to avoid ss. 92(5) and (6) (p. 7)

Similar results apply to a disposition by a partnership of its shares in the FA through the operation of subsections 92(5) and (6). Again, tax-deferred internal reorganizations may not be possible without a QROC election.

Subsection 92(5) - Deemed gain from the disposition of a share

Administrative Policy

7 May 2014 Internal T.I. 2012-0433731I7 - Application of subsections 92(5) and (6)

S. 85(2) transfer of shares on which previous pre-acq dividend triggered s. 92(5) gain to Canco partner

Two Canadian corporations ("Canco" and "Subco") were the respective limited and general partners of "LP" which, in turn, held all of the shares of "Forco"), which paid a dividend from its pre-acquisition surplus in Year 1, with Canco including its share of the dividend in income and claiming the s. 113(1)(d) deduction. In Year 3 LP transferred all of its shares in Forco to newly-formed "ULC" in consideration for the issuance of shares, with a joint s. 85(2) election made designating the shares' ACB as the elected amount.

Should the deemed gain to Canco under s. 92(5) arising from the Year 3 disposition result in an adjustment to: the proceeds of disposition ("POD") reported by LP; the ACB of the Forco shares received by ULC; or the elected amount described under s. 85(1)(a)? CRA stated:

[T]he ACB of the Forco shares held by LP would not be reduced by the amount of the Dividend paid from Forco's pre-acquisition surplus. … Canco was deemed to realize a gain in Year 3… equal [to] the total of amounts deducted by Canco under paragraph 113(1)(d) in respect of Forco dividends received through LP that were paid out of Forco's pre-acquisition surplus, less any foreign tax paid in respect of Canco's share of those dividends. …[T]he deemed gain…would not result in an adjustment to LP's POD and…ULC's ACB of the transferred shares and, consequently, would not affect an "agreed amount" under subsection 85(1) by virtue of subsection 85(2).

22 May 2014 IFA Roundtable, 2014-0526751C6 - Adjusted cost base of foreign affiliate shares

no administrative relief even where rollover at partnership level

Will the CRA provide administrative relief in circumstances where the partnership interest or foreign affiliate shares are disposed of as part of an internal reorganization that, absent subsections 92(4) through (6), would occur on a tax-deferred basis? CRA stated:

[T]he amount of the increase to the proceeds of disposition under subsection 92(4) and the amount of the deemed gain determined under subsection 92(6)… are both calculated in relation to the amount of dividends from the pre-acquisition surplus of the foreign corporation that was held through the partnership. …In either circumstance, the application of these provisions results from a disposition of property, being the disposition of an interest in the partnership for purposes of subsection 92(4), or the disposition by the partnership of its shares of a foreign corporation for purposes of subsections 92(5) and (6).

After referring to 7 May 2014 Memo 2012-0433731I7 immediately above, CRA stated:

[W]e have taken this opportunity to consult with officials within the Compliance Programs Branch, and we confirm that there is no administrative relief available in the circumstances that you have described.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(6) no relief from interest and penalties 117
Tax Topics - Income Tax Act - Section 90 - Subsection 90(6) s. 90(6) relationship tested at time of loan 367


Geoffrey S. Turner, "ACB Adjustments for Foreign Affiliate Shares Held Through Partnerships", International Tax (Wolters Kluwer CCH), No. 79, December 2014, p. 1.

No immediate ACB grind for pre-acq dividends received by partnership (p.4)

Thus, instead of applying the regular ACB reduction rule in subsection 92(2) to pre-acquisition surplus dividends received on foreign affiliate shares held by a partnership, the Act defers the consequence of the pre-acquisition surplus dividend until such time as either the foreign affiliate shares or the partnership interest is disposed, and deems the Canadian corporate partner to have either a gain or increased proceeds of disposition in the same amount as the subsection 92 ACB reduction that would otherwise have applied.

Gain instead under s. 92(4) on FA share or partnership interest disposition (p.4)

[T]he problem is that the subsection 92(4) or (5) deemed proceeds/gain consequences will arise on any disposition of the partnership interest or foreign affiliate shares, regardless of whether the disposition occurs pursuant to a tax-deferred rollover.

Potential cure through QROC election (p.4)

In some cases, taxpayers holding foreign affiliate shares through a partnership may be able to use "self-help" to avoid the latent proceeds/gain recognition under subsections 92(4) and (5). In particular, a taxpayer may be able to avoid pre-acquisition surplus dividends and instead ensure that any such distributions are made by the foreign affiliate as a capital distribution to the partnership that can be electively treated as a QROC. However, this solution will not be available in all cases since capital distributions are not possible under the corporate laws of all countries or may be subject to more onerous approval requirements.

Adopt QROC scheme as legislative cure? (p.5)

[T]he scheme of the Act is similar for pre-acquisition surplus dividends and QROCs, in that both are taxed essentially as tax-free returns of capital that reduce ACB. But where the foreign affiliate shares are held in a partnership, the Act departs from this scheme for pre-acquisition surplus dividends by substituting the deferred proceeds/gain recognition consequences of subsections 92(4) and (5) in lieu of an immediate ACB reduction. The solution may be to adopt the QROC ACB reduction mechanics for pre-acquisition surplus dividends….

Paul Barnicke, Melanie Huynh, "FA Shares Held in Partnership", Canadian Tax Highlights, Vol 22, No 6, June 2014, p. 8

Additional problem where partner is an FA (pp. 8-9)

The problem created by subsections 92(4) to 92(6) is not limited to structures in which a partner is a Canco: the rules apply equally to offshore structures in which the partner is another FA of a corporate or non-corporate taxpayer. In the offshore context, if a transfer is otherwise subject to a rollover provision, a gain may be triggered because of the operation of subsections 92(4) to 92(6) and, depending on the excluded-property status of the transferred partnership interest or FA shares, a gain may give rise to FAPI or to hybrid surplus. This problem is exacerbated by subsection 90(2), which deems all distributions – whether they are legally dividends or returns of PUC – to be dividends for the purposes of the Act. A partnership that receives a legal return of PUC can elect under subsection 90(3) to treat the payment as a return of capital and not as a dividend in order to avoid the potential trap in subsections 92(4) to (92(6); but a significant onus is thus placed on the taxpayer in Canada to detect the existence of a triggering situation and then to ensure that the election is filed.