Regulation 5900

Subsection 5900(3)

Administrative Policy

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

corporate-owned LP treated transparently to avoid a surplus anomaly re s. 91(5) dividend

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.

S. 93.1(2)(d)(i) limits the s. 113 deduction of Canco to the portion of the $3,000 dividend that is included in its income under s. 96(1). 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). However, as CRA does not take into account interest relating to acquisitions by a partnership of FA shares for 93.1(2)(d)(i) limit purposes, the s. 113(1) deduction of Canco is $1,000 rather than $700 – so that 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).

CRA considered this to be the appropriate result: there would have been the same $300 loss had Canco directly owned FA ($3,000 dividend - $3,000 s. 113(1) deduction - $300 interest expense). However, it was 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.

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 Act - Section 91 - Subsection 91(5) appplication of s. 91(5) to LP shareholder of FA 88

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

partnership between 2 CFAs was a Cdn-resident person for s. 91(5) purposes

A partnership (FP) between two CFAs of Canco received 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, the dividends from NRco were not excluded under the para. (b) FAPI exclusion. However, FP was entitled to an offsetting deduction under s. 91(5) and Reg. 5900(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 DRUPA partnership 38
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 227
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 105