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Technical Tax Amendments Act, 2012 (S.C. 2013, c. 34)

Assented to 2013-06-26

  •  (1) Subsection 5906(2) of the Regulations is replaced by the following:

    • (2) The expression “permanent establishment” means

      • (a) for the purposes of paragraph (1)(a) and the definition “earnings” in subsection 5907(1) (which paragraph or definition is referred to in this paragraph as a “provision”),

        • (i) if the expression is given a particular meaning in a tax treaty with a country, a permanent establishment within the meaning assigned by that tax treaty with respect to the business carried on in that country by the foreign affiliate referred to in the provision, and

        • (ii) in any other case, a fixed place of business of the affiliate, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, or if the affiliate does not have any fixed place of business, the principal place at which the affiliate’s business is conducted; and

      • (b) for the purposes of subdivision i of Division B of Part I of the Act,

        • (i) if the expression is given a particular meaning in a tax treaty with a country, a permanent establishment within the meaning assigned by that tax treaty if the person or partnership referred to in the relevant portion of that subdivision (which person or partnership is referred to in this paragraph and subsection (3) as the “person”) is a resident of that country for the purpose of that tax treaty, and

        • (ii) in any other case, a fixed place of business of the person, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, or if the person does not have any fixed place of business, the principal place at which the person’s business is conducted.

    • (3) For the purposes of subparagraphs (2)(a)(ii) and (b)(ii),

      • (a) if the affiliate or the person, as the case may be, carries on business through an employee or agent, established in a particular place, who has general authority to contract for the affiliate or the person or who has a stock of merchandise owned by the affiliate or the person from which the employee or agent regularly fills orders, the affiliate or the person is deemed to have a fixed place of business at that place;

      • (b) if the affiliate or the person, as the case may be, is an insurance corporation, the affiliate or the person is deemed to have a fixed place of business in each country in which the affiliate or the person is registered or licensed to do business;

      • (c) if the affiliate or the person, as the case may be, uses substantial machinery or equipment at a particular place at any time in a taxation year, the affiliate or the person is deemed to have a fixed place of business at that place;

      • (d) the fact that the affiliate or the person, as the case may be, has business dealings through a commission agent, broker or other independent agent or maintains an office solely for the purchase of merchandise at a particular place does not of itself mean that the affiliate or the person has a fixed place of business at that place; and

      • (e) the fact that the affiliate or the person, as the case may be, has a subsidiary controlled corporation at a place or a subsidiary controlled corporation engaged in trade or business at a place does not of itself mean that the affiliate or person has a fixed place of business at that place.

  • (2) Subsection (1) applies to taxation years of a foreign affiliate of a taxpayer that end after 1999 except that, for taxation years of the affiliate that end on or before December 18, 2009, the portion of paragraph 5906(2)(b) of the Regulations, as enacted by subsection (1), before its subparagraph (i) is to be read as follows:

    • (b) for the purposes of subdivision i of Division B of Part I (other than the definitions “excluded income” and “excluded revenue” in subsection 95(2.5)) of the Act,

  •  (1) The definition “loss” in subsection 5907(1) of the Regulations is replaced by the following:

    “loss”

    “loss”, of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business, means

    • (a) in the case of an active business carried on by it in a country, the amount of its loss for the year from the active business carried on in the country computed by applying the provisions of paragraph (a) of the definition “earnings” respecting the computation of earnings from that active business carried on in that country, with any modifications that the circumstances require, and

    • (b) in any other case, the total of all amounts each of which is an amount of a loss that is required under paragraph 95(2)(a) of the Act to be included in computing the affiliate’s income or loss from an active business for the year; (perte)

  • (2) Paragraph (b) of the definition “earnings” in subsection 5907(1) of the Regulations is replaced by the following:

    • (b) in any other case, the total of all amounts each of which is an amount of income that is required under paragraph 95(2)(a) of the Act to be included in computing the affiliate’s income or loss from an active business for the year; (gains)

  • (3) Subparagraph (a)(ii) of the definition “exempt earnings” in subsection 5907(1) of the Regulations is replaced by the following:

    • (ii) the amount of the taxable capital gains for the year referred to in subparagraphs (c)(i), (d)(iii), (e)(i) and (f)(iv) of the definition “net earnings”, and

  • (4) The definition “exempt earnings” in subsection 5907(1) of the Regulations is amended by adding the following after paragraph (a):

    • (a.1) the amount determined by the formula

      A – B

      where

      A 
      is the total of all amounts each of which is a particular amount that would be included, in respect of a particular business of the particular affiliate, by paragraph (c), (c.1) or (c.2) of the definition “capital dividend account” in subsection 89(1) of the Act in determining the particular affiliate’s capital dividend account at the end of the year if
      • (i) the particular affiliate were the corporation referred to in that definition,

      • (ii) the references in paragraphs (c.1) and (c.2) of that definition, and in paragraph (c) of that definition as that paragraph (c) read in its application to taxation years that ended before February 28, 2000, to “a business” were read as references to a business that

        • (A) is not an active business (as defined in subsection 95(1) of the Act), or

        • (B) is an active business (as defined in that subsection 95(1)) the particular affiliate’s earnings from which for the year are determined under subparagraph (a)(iii) of the definition “earnings”, and

      • (iii) the particular amount did not include any amount that can reasonably be considered to have accrued while no person or partnership that carried on the particular business was a specified person or partnership (within the meaning of section 95 of the Act) in respect of the particular corporation, and

      B 
      is the amount determined for A at the end of the particular affiliate’s taxation year that immediately precedes the year,
  • (5) Paragraph (d) of the definition “exempt earnings” in subsection 5907(1) of the Regulations is replaced by the following:

    • (d) where the year is the 1976 or any subsequent taxation year of the particular affiliate and the particular affiliate is, throughout the year, resident in a designated treaty country,

      • (i) the particular affiliate’s net earnings for the year from an active business carried on by it in Canada or a designated treaty country, or

      • (ii) the particular affiliate’s earnings for the year from an active business to the extent that they derive from

        • (A) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(i) of the Act and that would

          • (I) if earned by the other foreign affiliate referred to in subclause 95(2)(a)(i)(A)(I) of the Act, be included in computing the exempt earnings or exempt loss of the other foreign affiliate for a taxation year, or

          • (II) if earned by the life insurance corporation referred to in subclause 95(2)(a)(i)(A)(II) of the Act and based on the assumptions contained in subclause 95(2)(a)(i)(B)(II) of the Act, be included in computing the exempt earnings or exempt loss of the life insurance corporation for a taxation year,

        • (B) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(A) of the Act where the income is derived from amounts that are paid or payable by the life insurance corporation referred to in that clause and are for expenditures that would, if that life insurance corporation were a foreign affiliate of the particular corporation, be deductible in computing its exempt earnings or exempt loss for a taxation year,

        • (C) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(B) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that are deductible in computing the exempt earnings or exempt loss, for a taxation year, of the other foreign affiliate referred to in that clause,

        • (D) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(C) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that are deductible in computing its exempt earnings or exempt loss for a taxation year,

        • (E) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(D) of the Act if

          • (I) the country referred to in subclause 95(2)(a)(ii)(D)(IV) of the Act is a designated treaty country, and

          • (II) that income would be required to be so included if

            1. paragraph (a) of the definition “excluded property” in subsection 95(1) of the Act were read as follows:

            • (a) used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business carried on by it in a designated treaty country (within the meaning assigned by subsection 5907(11) of the Income Tax Regulations),

            2. paragraph (c) of that definition “excluded property” were read as follows:

            • (c) property all or substantially all of the income from which is, or would be, if there were income from the property, income from an active business (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph (2)(a) if that paragraph were read without reference to subparagraph (v)) that is included in computing the foreign affiliate’s exempt earnings, or exempt loss, as defined in subsection 5907(1) of the Income Tax Regulations, for a taxation year,

        • (F) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iii) of the Act to the extent that the trade accounts receivable referred to in that subparagraph arose in the course of an active business carried on by the other foreign affiliate referred to in that subparagraph the income or loss from which is included in computing its exempt earnings or exempt loss for a taxation year,

        • (G) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iv) of the Act to the extent that the loans or lending assets referred to in that subparagraph arose in the course of an active business carried on by the other foreign affiliate referred to in that subparagraph the income or loss from which is included in computing its exempt earnings or exempt loss for a taxation year,

        • (H) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(v) of the Act, where all or substantially all of its income, from the property described in that subparagraph, is, or would be if there were income from the property, income from an active business (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph 95(2)(a) of the Act if that paragraph were read without reference to its subparagraph (v) and, for greater certainty, excludes income arising as a result of the disposition of the property) that is included in computing its exempt earnings or exempt loss for a taxation year, or

        • (I) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(vi) of the Act, where the agreement for the purchase, sale or exchange of currency referred to in that subparagraph can reasonably be considered to have been made by the particular affiliate to reduce its risk with respect to an amount of income or loss that is included in computing its exempt earnings or exempt loss for a taxation year, or

  • (6) Subparagraph (a)(ii) of the definition “exempt loss” in subsection 5907(1) of the Regulations is replaced by the following:

    • (ii) the amount of the allowable capital losses for the year referred to in subparagraphs (c)(i), (d)(iii), (e)(i) and (f)(iv) of the definition “net loss”, and

  • (7) The definition “exempt loss” in subsection 5907(1) of the Regulations is amended by adding the following after paragraph (a):

    • (a.1) the total of all amounts each of which is the portion of an eligible capital expenditure of the affiliate, in respect of a business of the affiliate, that was not included at any time in the affiliate’s cumulative eligible capital in respect of the business, if

      • (i) the business

        • (A) is not an active business (as defined in subsection 95(1) of the Act), or

        • (B) is an active business (as defined in subsection 95(1) of the Act) the affiliate’s earnings from which for the year are determined under subparagraph (a)(iii) of the definition “earnings”, and

      • (ii) in computing its income for the year, the affiliate has deducted an amount described in paragraph 24(1)(a) of the Act for the year in respect of the business,

  • (8) Paragraph (c) of the definition “exempt loss” in subsection 5907(1) of the Regulations is replaced by the following:

    • (c) where the year is the 1976 or any subsequent taxation year of the affiliate and the affiliate is, throughout the year, resident in a designated treaty country,

      • (i) the affiliate’s net loss for the year from an active business carried on by it in Canada or a designated treaty country, or

      • (ii) the amount by which

        • (A) the affiliate’s loss for the year from an active business to the extent determined under subparagraph (d)(ii) of the definition “exempt earnings” in respect of the year with any modifications that the circumstances require

        exceeds

        • (B) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under clause (A), or

  • (9) Paragraphs (b) and (c) of the definition “exempt surplus” in subsection 5907(1) of the Regulations are replaced by the following:

    • (b) the last time for which the opening exempt surplus of the subject affiliate in respect of the corporation was required to be determined under section 5905, and

    • (c) the last time for which the opening exempt deficit of the subject affiliate in respect of the corporation was required to be determined under section 5905

  • (10) Subparagraph (i) of the description of A in the definition “exempt surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (i) the opening exempt surplus, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),

  • (11) The description of A in the definition “exempt surplus” in subsection 5907(1) of the Regulations is amended by striking out “or” at the end of subparagraph (vi) and by adding the following after that subparagraph:

    • (vi.1) each amount that is required, under section 5905, to be included under this subparagraph in the period and before the particular time, or

  • (12) Subparagraph (i) of the description of B in the definition “exempt surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (i) the opening exempt deficit, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (c),

  • (13) Subparagraph (v) of the description of B in the definition “exempt surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (v) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(d)(xii) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or

  • (14) The definition “net earnings” in subsection 5907(1) of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (d):

    • (e) from the disposition of a property that is an excluded property of the affiliate that is described in paragraph (c) of the definition “excluded property” in subsection 95(1) of the Act but that would not be an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition “exempt earnings” is the amount, if any, by which

      • (i) the portion of the affiliate’s taxable capital gain for the year from the disposition of the property that accrued after its 1975 taxation year

      exceeds

      • (ii) the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax that was paid in respect of the amount determined under subparagraph (i), and

    • (f) from a particular disposition of a property, that is an excluded property of the affiliate because of paragraph (c.1) of the definition “excluded property” in subsection 95(1) of the Act, that related to

      • (i) an amount that was receivable under an agreement that relates to the sale of a particular property the taxable capital gain or allowable capital loss from the sale of which is included under any of paragraphs (c) to (e) of this definition or of the definition “net loss”, as the case may be,

      • (ii) an amount that was receivable and was a property that was described in paragraph (c) of that definition “excluded property” but that would not have been an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition “exempt earnings”, or

      • (iii) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition “excluded property” arising in respect of the acquisition of an excluded property of the affiliate any taxable capital gain or allowable capital loss from the disposition of which would, if that excluded property were disposed of, be included under any of paragraphs (c) to (e) of this definition or of the definition “net loss”, as the case may be,

      is the amount, if any, by which

      • (iv) the portion of the affiliate’s taxable capital gain for the year from the particular disposition that accrued after its 1975 taxation year

      exceeds

      • (v) the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax that was paid for the year in respect of the amount determined under subparagraph (iv); (gains nets)

  • (15) The definition “net loss” in subsection 5907(1) of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (d):

    • (e) from the disposition of a property, that is an excluded property of the affiliate that is described in paragraph (c) of the definition “excluded property” in subsection 95(1) of the Act but that would not be an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition “exempt earnings” is the amount, if any, by which

      • (i) the portion of the affiliate’s allowable capital loss for the year from the disposition of the property that accrued after its 1975 taxation year

      exceeds

      • (ii) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under subparagraph (i), and

    • (f) from a particular disposition of a property, that is an excluded property of the affiliate because of paragraph (c.1) of the definition “excluded property” in subsection 95(1) of the Act, that related to

      • (i) an amount that was receivable under an agreement that relates to the sale of a particular property the taxable capital gain or allowable capital loss from the sale of which is included under any of paragraphs (c) to (e) of this definition or of the definition “net earnings”, as the case may be,

      • (ii) an amount that was receivable and was a property that was described in paragraph (c) of that definition “excluded property” but that would not have been an excluded property of the affiliate if that paragraph were read in the manner described in sub-subclause (d)(ii)(E)(II)2 of the definition “exempt earnings”, or

      • (iii) an amount payable, or an amount of indebtedness, described in clause (c.1)(ii)(B) of that definition “excluded property” arising in respect of the acquisition of an excluded property of the affiliate any taxable capital gain or allowable capital loss from the disposition of which would, if that excluded property were disposed of, be included under any of paragraphs (c) to (e) of this definition or of the definition “net earnings”, as the case may be,

      is the amount, if any, by which

      • (iv) the portion of the affiliate’s allowable capital loss for the year from the particular disposition that accrued after its 1975 taxation year

      exceeds

      • (v) the portion of any income or profits tax refunded by the government of a country for the year to the affiliate that can reasonably be regarded as tax that was refunded in respect of the amount determined under subparagraph (iv); (perte nette)

  • (16) Subparagraphs (b)(iii) to (v) of the definition “taxable earnings” in subsection 5907(1) of the Regulations are replaced by the following:

    • (iii) the affiliate’s earnings for the year as determined under paragraph (b) of the definition “earnings” minus the portion of any income or profits tax paid to the government of a country for a year by the affiliate that can reasonably be regarded as tax in respect of those earnings, or

    • (iv) to the extent not included under subparagraph (ii), the affiliate’s net earnings for the year determined under paragraphs (c) to (f) of the definition “net earnings”,

  • (17) Subparagraphs (b)(iii) and (iv) of the definition “taxable loss” in subsection 5907(1) of the Regulations are replaced by the following:

    • (iii) the affiliate’s loss for the year as determined under paragraph (b) of the definition “loss” minus the portion of any income or profits tax refunded by the government of a country for a year to the affiliate that can reasonably be regarded as tax refunded in respect of that loss, or

    • (iv) to the extent not included under subparagraph (ii), the affiliate’s net loss for the year determined under paragraphs (c) to (f) of the definition “net loss”,

  • (18) Paragraphs (b) and (c) of the definition “taxable surplus” in subsection 5907(1) of the Regulations are replaced by the following:

    • (b) the last time for which the opening taxable surplus of the subject affiliate in respect of the corporation was required to be determined under section 5905, and

    • (c) the last time for which the opening taxable deficit of the subject affiliate in respect of the corporation was required to be determined under section 5905

  • (19) Subparagraph (i) of the description of A in the definition “taxable surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (i) the opening taxable surplus, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),

  • (20) The description of A in the definition “taxable surplus” in subsection 5907(1) of the Regulations is amended by adding the following after subparagraph (iv):

    • (iv.1) each amount that is required under section 5905 to be included under this subparagraph in the period and before the particular time, or

  • (21) Subparagraph (i) of the description of B in the definition “taxable surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (i) the opening taxable deficit, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (c),

  • (22) Subparagraph (v) of the description of B in the definition “taxable surplus” in subsection 5907(1) of the Regulations is replaced by the following:

    • (v) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(k)(xi) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or

  • (23) The definition “underlying foreign tax” in subsection 5907(1) of the Regulations is amended by adding “and” at the end of paragraph (a) and by replacing paragraphs (b) and (c) with the following:

    • (b) the last time for which the opening underlying foreign tax of the subject affiliate in respect of the corporation was required to be determined under section 5905

  • (24) Subparagraph (i) of the description of A in the definition “underlying foreign tax” in subsection 5907(1) of the Regulations is replaced by the following:

    • (i) the opening underlying foreign tax, if any, of the subject affiliate in respect of the corporation as determined under section 5905, at the time established in paragraph (b),

  • (25) Subparagraph (iii) of the description of B in the definition “underlying foreign tax” in subsection 5907(1) of the Regulations is replaced by the following:

    • (iii) each amount that is required under section 5902 or 5905 to be included under this subparagraph, or subparagraph (1)(l)(x) as it applies to taxation years that end before February 22, 1994, in the period and before the particular time, or

  • (26) Paragraph (b) of the definition “underlying foreign tax applicable” in subsection 5907(1) of the Regulations is replaced by the following:

    • (b) any additional amount in respect of the whole dividend that the corporation claims in its return of income under Part I of the Act in respect of the whole dividend, not exceeding the amount that is the lesser of

      • (i) the amount by which the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation exceeds the amount determined under paragraph (a), and

      • (ii) the amount by which the affiliate’s underlying foreign tax in respect of the corporation immediately before the whole dividend was paid exceeds the amount determined under paragraph (a); (montant intrinsèque d’impôt étranger applicable)

  • (27) Paragraph (b) of the definition “whole dividend” in subsection 5907(1) of the Regulations is replaced by the following:

    • (b) where a whole dividend is deemed by subparagraph 5902(1)(a)(ii) to have been paid at the same time on shares of more than one class of an affiliate’s capital stock, for the purpose only of that subparagraph, the whole dividend deemed to have been paid at that time on the shares of a class of the affiliate’s capital stock is deemed to be the total of all amounts each of which is a whole dividend deemed to have been paid at that time on the shares of a class of the affiliate’s capital stock, and

  • (28) The portion of the definition gains exonérés in subsection 5907(1) of the French version of the Regulations before paragraph (a) is replaced by the following:

    gains exonérés En ce qui concerne une société étrangère affiliée d’une société donnée pour une année d’imposition de la société affiliée, le total des sommes représentant chacune l’une des sommes ci-après, moins la partie de l’impôt sur le revenu ou sur les bénéfices payé par la société affiliée pour l’année au gouvernement d’un pays qu’il est raisonnable de considérer comme un impôt sur les gains visés à l’alinéa c) ou au sous-alinéa d)(ii) :

  • (29) The portion of paragraph (a) of the definition gains exonérés in subsection 5907(1) of the French version of the Regulations after subparagraph (iii) is replaced by the following:

    pour l’application du présent alinéa, lorsque la société affiliée a disposé d’immobilisations qui étaient des actions du capital-actions d’une autre société étrangère affiliée de la société donnée en faveur d’une autre société qui était, immédiatement après la disposition, une société étrangère affiliée de la société donnée, est exclue des gains en capital de la société affiliée pour l’année la partie de ces gains qui correspond au total des sommes représentant chacune l’excédent de la juste valeur marchande, à la fin de l’année d’imposition 1975 de la société affiliée, de l’une des actions dont il a été disposé sur son prix de base rajusté;

  • (30) Subsection 5907(1.02) of the Regulations is repealed.

  • (31) Section 5907 of the Regulations is amended by adding the following after subsection (1.01):

    • (1.02) For the purposes of paragraph (d) of the definition “exempt earnings” and paragraph (c) of the definition “exempt loss” in subsection (1), if a foreign affiliate of a corporation becomes a foreign affiliate of the corporation in a taxation year of the affiliate, otherwise than as a result of a transaction between persons that do not deal with each other at arm’s length, and the affiliate is resident in a designated treaty country at the end of the year, the affiliate is deemed to be so resident throughout the year.

  • (32) Subparagraph 5907(1.1)(b)(ii) of the Regulations is replaced by the following:

    • (ii) an amount is paid by the primary affiliate to a secondary affiliate in respect of a reduction or refund, because of a loss or a tax credit of the secondary affiliate for a taxation year, of the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group

      • (A) in respect of the primary affiliate,

        • (I) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the exempt surplus or included in the exempt deficit, as the case may be, of the secondary affiliate shall, at the end of the year to which the loss or the tax credit relates, be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the primary affiliate, and

        • (II) the portion of the amount so paid that can reasonably be regarded as relating to an amount deducted from the taxable surplus or included in the taxable deficit, as the case may be, of the secondary affiliate shall, at the end of the year to which the loss or the tax credit relates, be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the primary affiliate and be added to the underlying foreign tax of the primary affiliate, and

      • (B) in respect of the secondary affiliate, the amount is deemed to be a refund to the secondary affiliate, for the year to which the loss or the tax credit relates, of income or profits tax in respect of the loss or the tax credit,

  • (33) The portion of subsection 5907(1.3) of the Regulations before paragraph (a) is replaced by the following:

    • (1.3) For the purpose of paragraph (b) of the definition “foreign accrual tax” in subsection 95(1) of the Act and subject to subsection (1.4),

  • (34) Section 5907 of the Regulations is amended by adding the following after subsection (1.3):

    • (1.4) If the amount prescribed under paragraph (1.3)(a) or (b), or any portion of the amount, can reasonably be considered to be in respect of a loss of another corporation for a taxation year of the other corporation, then the amount so prescribed is to be reduced to the extent that it can reasonably be considered to be in respect of the portion of that loss that would, if section 5903 were read without reference to its subsection (4), not be a foreign accrual property loss (within the meaning assigned by subsection 5903(3)) of a controlled foreign affiliate of a person or partnership that is, at the end of that taxation year, a relevant person or partnership (within the meaning assigned by subsection 5903(6)) in respect of the taxpayer.

    • (1.5) If subsection (1.4) applied to reduce an amount that would, in the absence of subsection (1.4), be prescribed by paragraph (1.3)(a) to be foreign accrual tax applicable to an amount (referred to in this subsection as the “FAPI amount”) included in the taxpayer’s income under subsection 91(1) of the Act for a taxation year (referred to in subsection (1.6) as the “FAPI year”) of the taxpayer, an amount equal to that reduction is, for the purpose of paragraph (b) of the definition “foreign accrual tax” in subsection 95(1) of the Act, prescribed to be foreign accrual tax applicable to the FAPI amount in the taxpayer’s taxation year that includes the last day of the designated taxation year, if any, of the particular affiliate referred to in paragraph (1.3)(a).

    • (1.6) For the purposes of subsection (1.5), the designated taxation year of the particular affiliate is a particular taxation year of the particular affiliate if

      • (a) in the particular year, or in the particular affiliate’s taxation year (referred to in this paragraph as the “PATY”) ending in the FAPI year and one or more taxation years of the particular affiliate each of which follows the PATY and the latest of which is the particular year, all losses of the particular affiliate and the other corporations referred to in paragraph (1.3)(a) for their taxation years ending in the FAPI year would, on the assumption that the particular affiliate and each of those other corporations had no foreign accrual property income for any taxation year, reasonably be considered to have been fully deducted (under the tax law referred to in paragraph (1.3)(a)) against income (as determined under that tax law) of the particular affiliate or those other corporations;

      • (b) the taxpayer demonstrates that no other losses of the particular affiliate or those other corporations for any taxation year were, or could reasonably have been, deducted under that tax law against that income; and

      • (c) the last day of the particular year occurs in one of the five taxation years of the taxpayer that immediately follow the FAPI year.

  • (35) Subsections 5907(2.7) and (2.8) of the Regulations are replaced by the following:

    • (2.7) Notwithstanding any other provision of this Part, if an amount (referred to in this subsection as the “inclusion amount”) is included in computing the income or loss from an active business of a foreign affiliate of a taxpayer for a taxation year under subparagraph 95(2)(a)(i) or (ii) of the Act and the inclusion amount is in respect of a particular amount paid or payable,

      • (a) if clause 95(2)(a)(ii)(D) of the Act is applicable, by the second affiliate referred to in that clause,

        • (i) the particular amount is to be deducted in computing the second affiliate’s income or loss from an active business carried on by it in the country in which it is resident for its earliest taxation year in which that amount was paid or payable,

        • (ii) the second affiliate is deemed to have carried on an active business in that country for that earliest taxation year, and

        • (iii) in computing the second affiliate’s income or loss for a taxation year from any source, no amount is to be deducted in respect of the particular amount except as required under subparagraph (i); and

      • (b) in any other case, by the other foreign affiliate referred to in subparagraph 95(2)(a)(i) or (ii) of the Act, as the case may be, or by a partnership of which the other foreign affiliate is a member, the particular amount is, except where it has been deducted under paragraph (2)(j) in computing the other foreign affiliate’s earnings or loss from an active business,

        • (i) to be deducted in computing the earnings or loss of the other foreign affiliate or the partnership, as the case may be, from the active business for its earliest taxation year in which the particular amount was paid or payable, and

        • (ii) not to be deducted in computing its earnings or loss from the active business for any other taxation year.

  • (36) Subsection 5907(5) of the Regulations is replaced by the following:

    • (5) For the purposes of this section, each capital gain, capital loss, taxable capital gain or allowable capital loss of a foreign affiliate of a taxpayer from the disposition of property shall be computed in accordance with the rules set out in subsection 95(2) of the Act and, for the purposes of subsection (6), if any such gain or loss is required to be computed in Canadian currency, the amount of such gain or loss shall be converted from Canadian currency into the currency referred to in subsection (6) at the rate of exchange prevailing on the date of disposition of the property.

  • (37) Subsection 5907(6) of the Regulations is replaced by the following:

    • (6) All amounts referred to in subsections (1) and (2) shall be maintained on a consistent basis from year to year in the currency of the country in which the foreign affiliate of the corporation resident in Canada is resident or any currency that the corporation resident in Canada demonstrates to be reasonable in the circumstances.

  • (38) Subsection 5907(12) of the Regulations is repealed.

  • (39) Subject to section 50, subsections (1) and (2) apply to taxation years of a foreign affiliate of a taxpayer that end after 1999.

  • (40) Subsections (3), (6) and (14) to (16) apply in respect of dispositions of property that occur after December 18, 2009.

  • (41) Subject to section 50, subsection (4) applies to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002, except that the description of A in paragraph (a.1) of the definition “exempt earnings” in subsection 5907(1) of the Regulations, as enacted by subsection (4), is, in its application to taxation years of the foreign affiliate that begin on or before December 18, 2009, to be read without reference to its subparagraph (iii).

  • (42) Subject to section 50, subsection (5) applies to taxation years of a foreign affiliate of a taxpayer that end after 1999, except that

    • (a) the portion of paragraph (d) of the definition “exempt earnings” in subsection 5907(1) of the Regulations before its subparagraph (i), as enacted by subsection (5), is, in its application to taxation years of the foreign affiliate that begin on or before December 18, 2009, to be read as follows:

      • (d) where the year is the 1976 or any subsequent taxation year of the particular affiliate and the particular affiliate is resident in a designated treaty country,

    • (b) subclause (d)(ii)(E)(II) of the definition “exempt earnings” in subsection 5907(1) of the Regulations, as enacted by subsection (5), is, in its application to taxation years of the foreign affiliate that begin after 2008 and on or before June 18, 2010, to be read as follows:

      • (II) that income would be required to be so included if paragraph (c) of the definition “excluded property” in subsection 95(1) of the Act were read as follows:

      • (c) property all or substantially all of the income from which is deemed, or would be deemed, if there were income from the property, to be income from an active business by paragraph (2)(a) (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph (2)(a) if that paragraph were read without reference to its subparagraph (v)) that is derived from amounts payable by payers who are, or would be, if they were foreign affiliates of the taxpayer, entitled to deduct the amounts in computing their exempt earnings or exempt loss, as defined in subsection 5907(1) of the Income Tax Regulations, for a taxation year,

    • (c) subject to paragraph (d), subparagraph (d)(ii) of the definition “exempt earnings” in subsection 5907(1) of the Regulations, as enacted by subsection (5), is, in its application to taxation years of the foreign affiliate that end after 1999 and begin before 2009, to be read as follows:

      • (ii) the particular affiliate’s earnings for the year from an active business to the extent that they derive from

        • (A) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(i) of the Act and that would,

          • (I) if earned by the non-resident corporation referred to in sub-subclause 95(2)(a)(i)(A)(I)1 of the Act and based on the assumptions contained in subclause 95(2)(a)(i)(B)(I) of the Act, be included in computing the exempt earnings or exempt loss of the non-resident corporation for a taxation year,

          • (II) if earned by the foreign affiliate referred to in sub-subclause 95(2)(a)(i)(A)(I)2 of the Act, be included in computing the exempt earnings or exempt loss of that foreign affiliate for a taxation year, or

          • (III) if earned by the life insurance corporation referred to in subclause 95(2)(a)(i)(A)(II) of the Act and based on the assumptions contained in subclause 95(2)(a)(i)(B)(I) of the Act, be included in computing the exempt earnings or exempt loss of the life insurance corporation for a taxation year,

        • (B) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(A) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that would be deductible in computing the exempt earnings or exempt loss for a taxation year of the non-resident corporation or the partnership, as the case may be, referred to in that clause if it were a foreign affiliate of the particular corporation,

        • (C) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(B) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that

          • (I) are deductible in computing the exempt earnings or exempt loss, for a taxation year, of the other foreign affiliate referred to in that clause, or

          • (II) would be deductible in computing the exempt earnings or exempt loss, for a taxation year, of the partnership referred to in that clause if the partnership were a foreign affiliate of the particular corporation,

        • (D) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(C) of the Act to the extent that the amounts paid or payable referred to in that clause are for expenditures that would be deductible in computing the exempt earnings or exempt loss, for a taxation year, of the partnership referred to in that clause if the partnership were a foreign affiliate of the particular corporation,

        • (E) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(D) of the Act if

          • (I) the country referred to in subclause 95(2)(a)(ii)(D)(IV) of the Act is a designated treaty country, and

          • (II) that income would be required to be so included if paragraph (c) of the definition “excluded property” in subsection 95(1) of the Act were read as follows:

            • (c) property all or substantially all of the income from which is deemed, or would be deemed if there were income from the property, to be income from an active business by paragraph (2)(a) (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph (2)(a) if that paragraph were read without reference to its subparagraph (v)) that is derived from amounts payable by payers who are, or would be, if they were foreign affiliates of the taxpayer, entitled to deduct the amounts in computing their exempt earnings or exempt loss, as defined in subsection 5907(1) of the Income Tax Regulations, for a taxation year,

        • (F) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under clause 95(2)(a)(ii)(E) of the Act where the income is derived from amounts that are paid or payable by the life insurance corporation referred to in that clause and are for expenditures that would, if that life insurance corporation were a foreign affiliate of the particular corporation, be deductible in computing its exempt earnings or exempt loss for a taxation year,

        • (G) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iii) of the Act to the extent that the trade accounts receivable referred to in that subparagraph arose in the course of an active business carried on by the non-resident corporation referred to in that subparagraph the income or loss from which would be included in computing its exempt earnings or exempt loss for a taxation year if it were a foreign affiliate of the particular corporation,

        • (H) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(iv) of the Act to the extent that the loans or lending assets referred to in that subparagraph arose in the course of an active business carried on by the non-resident corporation referred to in that subparagraph the income or loss from which would be included in computing its exempt earnings or exempt loss for a taxation year if it were a foreign affiliate of the particular corporation,

        • (I) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(v) of the Act, where all or substantially all of its income, from the property described in that subparagraph, is, or would be if there were income from the property, income from an active business (which, for this purpose, includes income that would be deemed to be income from an active business by paragraph 95(2)(a) of the Act if that paragraph were read without reference to its subparagraph (v) and, for greater certainty, excludes income arising as a result of the disposition of the property) that is included in computing its exempt earnings or exempt loss for a taxation year, or

        • (J) income that is required to be included in computing the particular affiliate’s income or loss from an active business for the year under subparagraph 95(2)(a)(vi) of the Act, where the agreement for the purchase, sale or exchange of currency referred to in that subparagraph can reasonably be considered to have been made by the particular affiliate to reduce its risk with respect to an amount of income or loss that is included in computing its exempt earnings or exempt loss for a taxation year, or

    • (d) subclause (d)(ii)(E)(II) of the definition “exempt earnings” in subsection 5907(1) of the Regulations, as set out in the read-as text contained in paragraph (c), is, in its application to taxation years of the foreign affiliate that end after 1999 and begin before December 21, 2002, to be read as follows:

      • (II) that income would be required to be so included if paragraph (c) of the definition “excluded property” in subsection 95(1) of the Act were read without reference to amounts receivable referred to in that paragraph (c), where the interest on the amounts is not, or would not be if interest were payable on the amounts, deductible in computing the debtor’s exempt earnings or exempt loss for a taxation year,

  • (43) Subsections (7), (31), (36) and (37) apply to taxation years of a foreign affiliate of a taxpayer that begin after December 18, 2009.

  • (44) Subject to section 50, subsection (8) applies to taxation years of a foreign affiliate of a taxpayer that end after 1999, except that the portion of paragraph (c) of the definition “exempt loss” in subsection 5907(1) of the Regulations before subparagraph (i), as enacted by subsection (8), is, in its application to taxation years of the foreign affiliate that begin on or before December 18, 2009, to be read as follows:

    • (c) where the year is the 1976 or any subsequent taxation year of the affiliate and the affiliate is resident in a designated treaty country,

  • (45) Subsections (9), (10), (12), (13), (18), (19) and (21) to (25) are deemed to have come into force on December 1, 1999.

  • (46) Subsections (11) and (20) apply where a share of the capital stock of a foreign affiliate of a corporation is acquired by, otherwise becomes property of, or is disposed of by, a person after December 20, 2002.

  • (47) Subject to section 50, subsection (17) applies to taxation years of a foreign affiliate of a taxpayer that end after 1999, except that, in respect of dispositions of property that occur before December 18, 2009, subparagraph (b)(iv) of the definition “taxable loss” in subsection 5907(1) of the Regulations, as enacted by subsection (17), is to be read as follows:

    • (iv) to the extent not included under subparagraph (ii), the affiliate’s net loss for the year determined under paragraphs (c) and (d) of the definition “net loss”,

  • (48) Subsection (26) applies in respect of whole dividends paid on the shares of a class of the capital stock of a foreign affiliate of a corporation after December 18, 2009.

  • (49) Subsection (27) applies to elections made in respect of dispositions that occur after December 18, 2009.

  • (50) Subsections (28) and (29) apply to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002.

  • (51) Subsections (30) and (35) apply to taxation years of a foreign affiliate of a taxpayer that begin after 2008.

  • (52) Subsection (32) applies in respect of payments made after December 20, 2002.

  • (53) Subsections (33) and (34) apply to taxation years of a foreign affiliate of a taxpayer that begin after November 1999.

  • (54) Subsection (38) is deemed to have come into force on December 19, 2009.

 
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