Subsection 93.1(1) - Shares held by partnership
Articles
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. 2001-0111675 - Gross Amount of Dividend
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)(a)
Articles
Tina Korovilas, Drew Morier, "Non-Corporate Vehicles in the Foreign Affiliate Context", 2018 Conference Report (Canadian Tax Foundation), 20:1 – 114
Potential net taxable income inclusion as a result of pro rata FMV rule (p. 20:37)
[I]f the proportionate FMV of a member’s partnership interest is less than the member’s share of partnership income (on the basis of the allocation provided in the partnership agreement and included in the member’s income pursuant to paragraph 12(1)(l) and subsection 96(1)), the section 113 deductible amount is not sufficient to fully offset the income inclusion. This is because the dividend deemed received by the member pursuant to paragraph 93.1(2)(a), on which the section 113 deduction depends, is based on the proportionate FMV of the member’s partnership interest and not on the amount of the dividend actually allocated to the member pursuant to subsection 96(1).
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)
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 | 226 |
| Tax Topics - Income Tax Act - Section 91 - Subsection 91(5) | appplication of s. 91(5) to LP shareholder of FA | 88 |
Articles
Tina Korovilas, Drew Morier, "Non-Corporate Vehicles in the Foreign Affiliate Context", 2018 Conference Report (Canadian Tax Foundation), 20:1 – 114
S. 93.1(2)(d)(i) applies to gross amount of dividend
It seems to be a well-established and accepted position that the limitation is meant to apply to the gross amount of the dividend that is taken into account in computing the partnership’s income, without reference to interest or any other expense or deduction taken by the partnership to compute its net income. This position is consistent with the legislative history of the provision and with the CRA’s administrative approach.
Subsection 93.1(5)
Administrative Policy
21 September 2021 Internal T.I. 2019-0807491I7 - Subsections 93.1(5) and (6)
Canco held 100% of LLC2 through a US partnership (USP) and had an indirect 37% interest in USOpco. Having s. 95(2)(a)(ii)(B) deem the interest received by LLC2 from USOpco in 2011 and 2012 to be active business income for purposes of being excluded from the computation of USP’s foreign accrual property income (FAPI) turned on USP having a qualifying interest (QI) in USOpco. Since s. 95(2)(m) did not apply (USP did not own USOpco shares) nor did s. 95(2)(n) (USP was not a corporation), having such a QI turned on the coming-into-force (CIF) provision for ss. 93.1(5) and (6) (which otherwise applied only to the 2013 and subsequent taxation years) applying on the basis of the taxpayer (USP) having “elected[ed] in writing” and timely “file[d] the election with the Minister” to have ss. 93.1(5) and (6) apply to the earlier years. In rejecting Canco’s position that USP (which otherwise never made the election), should be treated as having made the election by virtue of Canco not reporting any FAPI of USP from the interest, the Directorate indicated that:
- Canco’s filing position did not constitute notice to CRA that the election was made.
- No extension for making the election could be allowed under s. 220(3.2), as the CIF provision was not listed in Reg. 600.
- It was “Rulings’ view that allowing subsection 220(2.1) to waive a taxpayer’s requirement to file an election not listed in Regulation 600 would negate the specific intention of Parliament in limiting late elections to only those that are prescribed in [Reg.] 600” – and, in any event, the CIF provision was not a provision of the Act itself, as required by s. 220(2.1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 220 - Subsection 220(2.1) | waiver under s. 220(2.1) cannot have the effect of permitting the late filing of an election not listed in Reg. 600 | 353 |
| Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2) | no extension can be made under s. 220(3.2) for an election not listed in Reg. 600, or through the back door under s. 220(2.1) | 262 |