Section 93.1

Subsection 93.1(1) - Shares held by partnership


Karthika Ariyakumaran, Michael Spinelli, "Holding a Foreign Affiliate Through a Partnership", Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.14

Dividend income may be allocated differently than relative FMV of interests (p. 14)

Canadian-resident corporations that hold an interest in a foreign affiliate through a partnership may not benefit fully from the favourable foreign affiliate regime if the dividend income in the partnership agreement is not allocated according to the FMV of the different partnership interests. This may occur, for example, when there are different classes of partnership units with different rights (for example, one partner might have the fixed partnership units from a partnership freeze while another partner might have the partnership units that would represent the growth in value of the partnership….

Example of resulting net taxable income inclusion even where full ES (p. 15)

[A] Canadian-resident corporation (Canco) is a member of a partnership. The partnership owns all of the outstanding shares of a foreign corporation (Forco). Forco is a foreign affiliate of Canco as a result of the deeming rule in subsection 93.1(1). The FMV of Canco's interest in the partnership is equal to 50 percent of the FMV of all of the members' interests in the partnership. According to the partnership agreement, Canco's income allocation is 70 percent. Forco has exempt surplus of $100. Forco pays a dividend of $100 to the partnership. On the basis of the partnership agreement, 70 percent of this income is allocated to Canco.

In the situation described above, Canco includes $70 of dividends in its income pursuant to subsection 90(1). However, subsection 93.1(2) deems each partner to have received a dividend equal to its proportionate FMV of the members' interests in the partnership. Accordingly, the section 113 deduction available to Canco is limited to $50, resulting in a net income inclusion of $20 that is subject to tax in Canada.

Nathan Boidman, "Canadian Foreign Affiliate Tax Proposals - Brief Overview", Tax Management International Journal, Vol. 29, No. 2, 11 February 2000, p. 100.

Subsection 93.1(2) - Where dividends received by a partnership

Administrative Policy

6 September 2002 External T.I. 2001-011167 -

Confirmation that s. 93.1(2)(d)(i) permits the partner to deduct its share of the gross amount of the dividends received by the partnership.

Paragraph 93.1(2)(d)

Subparagraph 93.1(2)(d)(i)

Administrative Policy

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

s. 93.1(2)(d)(i) limit does not reflect acquisition-debt interest deduction of LP

A taxable Canadian corporation and its wholly owned Canadian subsidiary (collectively “Canco”) have always owned 100% of a partnership (“LP”) that has always owned 100% of a non-resident corporation (“FA”), all having calendar fiscal periods. On December 31, 2016, FA had an exempt and taxable surplus balances of $3,000 and $2,000 (consisting of undistributed foreign accrual property income (“FAPI”) that was included in LP’s income) respectively in respect of Canco. In 2017 (during which it had no income or loss), FA paid a $3,000 dividend to LP, which was LP’s only income item other than $300 of deductible interest expense. This was deemed to be a $3,000 dividend paid out of the exempt surplus of FA in respect of Canco, and entitled LP to a $2,000 s. 91(5) deduction under Reg. 5900(3), resulting in income to LP of $700 (i.e., $3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense). As such, this $700 would be included in computing Canco’s income for its 2017 taxation year by virtue of paragraph 96(1)(f).

S. 93.1(2)(d)(i) limits the amount deductible by Canco under s. 113 respecting the dividend to the portion of the amount of the dividend that is included in its income pursuant to s. 96(1). Is the s. 91(5) deduction allowed to LP taken into account in determining this limitation.

CRA noted that if Canco had directly owned the FA shares, its 2017 taxable income would have been a $300 loss (i.e., $3,000 dividend - $3,000 s. 113(1) deduction - $300 interest expense).

Here, under subsection s. 96(1)(c), LP’s $2,000 s. 91(5) deduction and its $300 interest expense are both wholly applicable to its dividend income, so that $700 of the $3,000 dividend is included in Canco’s income for purposes of s. 93.1(2)(d)(i) ($3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense).

However, expenses such as interest relating to acquisitions by a partnership of foreign affiliate shares are not taken into account in applying the s. 93.1(2)(d)(i) limitation, so that only the s. 91(5) deduction is taken into account in determining that limit. Therefore, in computing its taxable income, Canco would have a loss of $300 (i.e., partnership income of $700, minus a s. 113(1)(a) deduction of $1,000 (the $3,000 dividend reduced by LP’s $2,000 s. 91(5) deduction) for a loss of $300).)

It is appropriate to reinstate $2,000 of exempt surplus of FA in respect of Canco, and to reduce its taxable surplus in respect of Canco by the same amount. That would bring the surplus accounts into line with Canco’s position.

Locations of other summaries Wordcount
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 220
Tax Topics - Income Tax Act - Section 91 - Subsection 91(5) appplication of s. 91(5) to LP shareholder of FA 86