Income Tax Regulations
5907 (1) For the purposes of this Part,
- active business
active business has the meaning assigned by subsection 95(1) of the Act; (entreprise exploitée activement)
- controlled foreign affiliate
controlled foreign affiliate has the meaning assigned by subsection 95(1) of the Act; (société étrangère affiliée contrôlée)
- earnings
earnings 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,
(i) the income or profit from the active business for the year computed in accordance with the income tax law of the country in which the affiliate is resident, in any case where the affiliate is required by that law to compute that income or profit,
(ii) the income or profit from the active business for the year computed in accordance with the income tax law of the country in which the business is carried on, in any case not described in subparagraph (i) where the affiliate is required by that law to compute that income or profit, and
(iii) in any other case, the amount that would be the income from the active business for the year under Part I of the Act if the business were carried on in Canada, the affiliate were resident in Canada and the Act were read without reference to subsections 80(3) to (12), (15) and (17) and 80.01(5) to (11) and sections 80.02 to 80.04,
adjusted in each case in accordance with subsections (2), (2.1), (2.2) and (2.9) and, for the purpose of this Part, to the extent that the earnings of an affiliate from an active business carried on by it cannot be attributed to a permanent establishment in any particular country, they shall be attributed to the permanent establishment in the country in which the affiliate is resident and, if the affiliate is resident in more than one country, to the permanent establishment in the country that may reasonably be regarded as the affiliate’s principal place of residence, and
(b) in any other case, the total of the amounts by which the income for the year from an active business of the affiliate is increased because of paragraph 95(2)(a) of the Act; (gains)
- exempt deficit
exempt deficit of a foreign affiliate of a corporation in respect of the corporation at any time means the amount, if any, by which
(a) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vi) of the description of B in the definition exempt surplus in this subsection
exceeds
(b) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vii) of the description of A in that definition; (déficit exonéré)
- exempt earnings
exempt earnings of a particular foreign affiliate of a particular corporation for a taxation year of the particular affiliate is the total of all amounts each of which is
(a) the amount by which the capital gains of the particular affiliate for the year exceed the total of
(i) the amount of the taxable capital gains for the year referred to in the description of B in the definition foreign accrual property income in subsection 95(1) of the Act,
(ii) the amount of the taxable capital gains for the year referred to in subparagraphs (c)(i) and (d)(iii) of the definition net earnings in this subsection, and
(iii) the portion of any income or profits tax paid to the government of a country for the year by the particular affiliate that can reasonably be regarded as tax in respect of the amount by which the capital gains of the particular affiliate for the year exceed the total of the amounts referred to in subparagraphs (i) and (ii),
and for the purpose of this paragraph, where the particular affiliate has disposed of capital property that was shares of the capital stock of another foreign affiliate of the particular corporation to any corporation that was, immediately after the disposition, a foreign affiliate of the particular corporation, the capital gains of the particular affiliate for the year shall not include the portion of those gains that is the total of all amounts each of which is an amount equal to the excess of the fair market value at the end of the particular affiliate’s 1975 taxation year of one of those shares disposed of over the adjusted cost base of that share,
(b) where the year is the 1975 or any preceding taxation year of the particular affiliate, the total of all amounts each of which is the particular affiliate’s net earnings for the year,
(c) where the year is the 1975 or any preceding taxation year of the particular affiliate, the earnings as determined in paragraph (b) of the definition earnings in this subsection to the extent that those earnings have not been included because of paragraph (b) or deducted in determining an amount included in subparagraph (b)(i) of the definition exempt loss in this subsection,
(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, each amount that is
(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 earnings of the particular affiliate for the year from an active business to the extent that they derive from
(A) amounts by which the income of the particular affiliate from an active business for the year is increased because of subparagraph 95(2)(a)(i) of the Act that are derived by the particular affiliate from activities that could reasonably be considered to be directly related to business activities carried on by a non-resident corporation, to which the particular affiliate and the particular corporation are related throughout the year, in the course of an active business carried on by the non-resident corporation the income from which would, if the non-resident corporation were a foreign affiliate of a corporation, be included in computing the non-resident corporation’s exempt earnings or exempt loss,
(B) where the particular corporation is a life insurance corporation resident in Canada throughout the year and the particular affiliate is a foreign affiliate in respect of which the particular corporation has a qualifying interest throughout the year, amounts by which the income of the particular affiliate from an active business for the year is increased because of subparagraph 95(2)(a)(i) of the Act that are derived by the particular affiliate from activities that could reasonably be considered to be directly related to business activities carried on by the particular corporation in the course of an active business carried on by the particular corporation in a country other than Canada, the income from which would, if the particular corporation were a foreign affiliate of another corporation and were resident in the country other than Canada in which that active business of the particular corporation is carried on, be included in computing the particular corporation’s exempt earnings or exempt loss,
(C) amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(A) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or a partnership of which it is a member by a non-resident corporation to which the particular affiliate and the particular corporation are related throughout the year, to the extent that, if the non-resident corporation were a foreign affiliate of a corporation, the amounts paid or payable by the non-resident corporation would be deductible in the year or a subsequent taxation year in computing its exempt earnings or exempt loss,
(D) where a non-resident corporation to which the particular affiliate and the particular corporation are related throughout the year is a member of a particular partnership (other than where the non-resident corporation is a specified member of the particular partnership at any time in a fiscal period of the particular partnership ending in the year), amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(A) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or another partnership of which it is a member by the particular partnership to the extent that, if the particular partnership were a foreign affiliate of a corporation and were resident in the country in which the non-resident corporation is resident and subject to income taxation, the amounts paid or payable by the particular partnership would be deductible in the year or a subsequent taxation year in computing its exempt earnings or exempt loss,
(E) amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(B) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or a partnership of which it is a member by another foreign affiliate of the particular corporation in respect of which the particular corporation has a qualifying interest throughout the year, to the extent that the amounts paid or payable by the other foreign affiliate are deductible in the year or a subsequent taxation year in computing its exempt earnings or exempt loss,
(F) where another foreign affiliate of the particular corporation in respect of which the particular corporation has a qualifying interest throughout the year is a member of a particular partnership (other than where the other foreign affiliate is a specified member of the particular partnership at any time in a fiscal period of the particular partnership ending in the year), amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(B) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or another partnership of which it is a member by the particular partnership, to the extent that, if the particular partnership were a foreign affiliate of a corporation and were resident in the country in which the other foreign affiliate is resident and subject to income taxation, the amounts paid or payable by the particular partnership would be deductible in the year or a subsequent taxation year in computing its exempt earnings or exempt loss,
(G) where the particular affiliate is a member of a particular partnership (other than where the particular affiliate is a specified member of the particular partnership at any time in a fiscal period of the particular partnership ending in the year), amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(C) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or another partnership of which it is a member by the particular partnership, to the extent that, if the particular partnership were a foreign affiliate of a corporation and were resident in the country in which the particular affiliate is resident and subject to income taxation, the amounts paid or payable by the particular partnership would be deductible in the year or a subsequent taxation year in computing its exempt earnings or exempt loss,
(H) amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(D) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or a partnership of which it is a member by another foreign affiliate (in this clause referred to as the “second affiliate”) of the particular corporation to which the particular affiliate and the particular corporation are related throughout the year, to the extent that the amounts paid or payable
(I) are on account of interest on borrowed money used for the purpose of earning income from property or interest on an amount payable for property, where
1. the property is shares of a foreign affiliate (in this clause referred to as the “third affiliate”) of the particular corporation in respect of which the particular corporation has a qualifying interest throughout the year and that are excluded property, and
2. the second affiliate, the third affiliate and each other affiliate relevant for the purpose of determining whether the shares of the third affiliate are excluded property are resident and subject to income taxation in a designated treaty country, and
(II) are relevant in computing the liability for income taxes, in the designated treaty country in which the second and third affiliates are resident, of the members of a group of corporations composed of the second affiliate and one or more other foreign affiliates (the shares of which are excluded property) of the particular corporation that are resident in that country and in respect of which the particular corporation has a qualifying interest throughout the year,
and, for the purpose of this clause, excluded property has the meaning assigned by subsection 95(1) of the Act, except that for that purpose,
(III) the definition excluded property in subsection 95(1) of the Act shall be read without reference to amounts receivable referred to in paragraph (c) of that definition where the interest on the amounts is not, or would not if interest were payable on the amounts, be deductible in computing the debtor’s exempt earnings or exempt loss, and
(IV) the shares of a foreign affiliate (in this subclause referred to as the “non-qualifying affiliate”) that is not resident and subject to income taxation in a designated treaty country are not considered relevant for the purpose of determining whether shares of the third affiliate are excluded property unless the shares of the third affiliate would not have been excluded property if the shares of all such non-qualifying affiliates were not excluded property,
(I) where the particular corporation is a life insurance corporation resident in Canada and the particular affiliate is a foreign affiliate in respect of which the particular corporation has a qualifying interest throughout the year, amounts by which the income of the particular affiliate from an active business for the year is increased because of clause 95(2)(a)(ii)(E) of the Act that are derived from amounts paid or payable, directly or indirectly, to it or a partnership of which it is a member by the particular corporation in the course of the particular corporation carrying on its life insurance business outside Canada, to the extent that, if the particular corporation were a foreign affiliate of another corporation and were resident in the country in which the particular corporation carried on its life insurance business outside Canada, the amounts paid or payable by the particular corporation would be deductible in the year or in a subsequent taxation year in computing its exempt earnings or exempt loss,
(J) amounts by which the income of the particular affiliate from an active business for the year is increased because of subparagraph 95(2)(a)(iii) of the Act that are derived from the factoring of trade accounts receivable acquired by the particular affiliate, or by a partnership of which the particular affiliate was a member, from a non-resident corporation to which the particular affiliate and the particular corporation are related throughout the year, to the extent that the trade accounts receivable arose in the course of an active business carried on by the non-resident corporation any income from which would be included in the exempt earnings of the non-resident corporation if it were a foreign affiliate of a corporation, or
(K) amounts by which the income of the particular affiliate from an active business for the year is increased because of subparagraph 95(2)(a)(iv) of the Act that are derived from loans or lending assets acquired by the particular affiliate or a partnership of which the particular affiliate was a member from a non-resident corporation to which the particular affiliate and the particular corporation are related throughout the year, to the extent that the loans or lending assets arose in the course of an active business carried on by the non-resident corporation any income from which would be included in the exempt earnings of the non-resident corporation if it were a foreign affiliate of a corporation, or
(e) where the year is the 1976 or any subsequent taxation year of the particular affiliate, each amount that is included in the particular affiliate’s exempt earnings for the year because of subsection (10),
minus the portion of any income or profits tax paid to the government of a country for the year by the particular affiliate that can reasonably be regarded as tax in respect of the earnings referred to in paragraph (c) or in subparagraph (d)(ii); (gains exonérés)
- exempt loss
exempt loss of a foreign affiliate of a corporation for a taxation year of the affiliate is the total of all amounts each of which is
(a) the amount by which the capital losses of the affiliate for the year exceed the total of
(i) the amount of the allowable capital losses for the year referred to in the description of E in the definition foreign accrual property income in subsection 95(1) of the Act,
(ii) the amount of the allowable capital losses for the year referred to in subparagraphs (c)(i) and (d)(iii) of the definition net loss in this subsection, and
(iii) 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 refunded in respect of the amount by which the capital losses of the affiliate for the year exceed the total of the amounts referred to in subparagraphs (i) and (ii),
(b) where the year is the 1975 or any preceding taxation year of the affiliate, the total of all amounts each of which is
(i) the affiliate’s net loss for the year from an active business carried on by it in a country, or
(ii) the amount, if any, for the year by which
(A) the amount determined under the description of D in the definition foreign accrual property income in subsection 95(1) of the Act for the year
exceeds
(B) the amount determined under the description of A in the definition foreign accrual property income in subsection 95(1) of the Act for the year,
(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, each amount that is the affiliate’s net loss for the year from an active business carried on by it in Canada or in a designated treaty country, or
(d) where the year is the 1976 or any subsequent taxation year of the affiliate, each amount that is included in the affiliate’s exempt loss for the year because of subsection (10); (perte exonérée
- exempt surplus
exempt surplus of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation is, at any particular time, the amount determined by the formula
A - B
in respect of the period beginning with the time that is the latest of
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) where the corporation is an acquiring corporation referred to in subsection 5905(5) and the subject affiliate is a particular affiliate referred to in that subsection or another foreign affiliate in which such a particular affiliate had an equity percentage at the time referred to in that subsection, the last time at which that subsection was applicable in respect of the subject affiliate, and
(c) where the subject affiliate is a foreign affiliate referred to in subsection 5905(1), (2), (8) or (9) or paragraph 5905(3)(b), the last time at which any of those subsections or that paragraph was applicable in respect of the subject affiliate
and ending with the particular time, where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening exempt surplus of the subject affiliate as determined under subsection 5905(1), (2), (3), (5), (8) or (9), at the time established in paragraph (a), (b) or (c),
(ii) the exempt earnings of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that was prescribed by paragraph 5900(1)(a) to have been paid out of the payer affiliate’s exempt surplus in respect of the corporation,
(iv) the portion of any income or profits tax refunded by or the amount of a tax credit paid by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded or paid in respect of any amount referred to in subparagraph (iii) and that was not deducted in determining any amount referred to in subparagraph (iii) of the description of B,
(v) the portion of any taxable dividend received in the period and before the particular time by the subject affiliate that would, if the dividend were received by the corporation, be deductible by it under section 112 of the Act,
(vi) an amount added to the exempt surplus of the subject affiliate or deducted from its exempt deficit in the period and before the particular time under any provision of subsection (1.1) or (1.2), or
(vii) an amount added, in the period and before the particular time, to the exempt surplus of the subject affiliate under paragraph (7.1)(d), and
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the opening exempt deficit of the subject affiliate as determined under subsection 5905(1), (2), (3), (5), (8) or (9), at the time established in paragraph (a), (b) or (c),
(ii) the exempt loss of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of any amount referred to in subparagraph (iii), (iv) or (v) of the description of A,
(iv) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed by paragraph 5901(1)(a) to have been paid out of the subject affiliate’s exempt surplus in respect of the corporation,
(v) each amount that is determined under paragraph 5902(4)(a) or subparagraph 5905(2)(a)(i), (6)(a)(i) or (8)(a)(i) in the period and before the particular time, or
(vi) an amount, in the period and before the particular time, deducted from the exempt surplus of the subject affiliate or added to its exempt deficit under any provision of subsection (1.1) or (1.2); (surplus exonéré)
- loss
loss of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business carried on by it in a country is the amount of its loss for the year from that active business carried on in that country computed by applying the provisions of paragraph (a) of the definition earnings in this subsection respecting the computation of earnings from that active business carried on in that country, with any modifications that the circumstances require; (perte)
- net earnings
net earnings of a foreign affiliate of a corporation for a taxation year of the affiliate
(a) from an active business carried on by it in a country is the amount of its earnings for the year from that active business carried on in that country minus 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 in respect of those earnings,
(b) in respect of foreign accrual property income is the amount that would be its foreign accrual property income for the year, if the formula in the definition foreign accrual property income in subsection 95(1) of the Act were read without reference to the variable F in that formula, minus 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 in respect of that income,
(c) from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada) is the amount, if any, by which
(i) the portion of the affiliate’s taxable capital gains for the year from those dispositions that can reasonably be considered to have accrued after November 12, 1981
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 in respect of the amount determined under subparagraph (i), and
(d) from dispositions of
(i) shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which paragraph 95(2)(c), (d) or (e) of the Act was applicable), or
(ii) partnership interests that were excluded property of the affiliate
is the amount, if any, by which
(iii) the portion of the affiliate’s taxable capital gains for the year from those dispositions that can reasonably be considered to have accrued after its 1975 taxation year
exceeds
(iv) 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 in respect of the amount determined under subparagraph (iii); (gains nets)
- net loss
net loss of a foreign affiliate of a corporation for a taxation year of the affiliate
(a) from an active business carried on by it in a country is the amount of its loss for the year from that active business carried on in that country minus 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 refunded in respect of that loss,
(b) in respect of foreign accrual property income is the amount, if any, by which
(i) the amount, if any, by which
(A) the total of the amounts determined under the descriptions of D, E and G in the definition foreign accrual property income in subsection 95(1) of the Act for the year
exceeds
(B) the total of the amounts determined under the descriptions of A, A.1, A.2, B and C in the definition foreign accrual property income in subsection 95(1) of the Act for the 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 refunded in respect of the amount determined under subparagraph (i),
(c) from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada) is the amount, if any, by which
(i) the portion of the affiliate’s allowable capital losses for the year from those dispositions that can reasonably be considered to have accrued after November 12, 1981
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 refunded in respect of the amount determined under subparagraph (i), and
(d) from dispositions of
(i) shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which paragraph 95(2)(c), (d) or (e) of the Act was applicable), or
(ii) partnership interests that were excluded property of the affiliate
is the amount, if any, by which
(iii) the portion of the affiliate’s allowable capital losses for the year from those dispositions that can reasonably be considered to have accrued after its 1975 taxation year
exceeds
(iv) 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 refunded in respect of the amount determined under subparagraph (iii); (perte nette)
- net surplus
net surplus of a foreign affiliate of a corporation resident in Canada in respect of the corporation is, at any particular time,
(a) if the affiliate has no exempt deficit and no taxable deficit, the amount that is the total of its exempt surplus and taxable surplus in respect of the corporation,
(b) if the affiliate has no taxable surplus, the amount, if any, by which its exempt surplus exceeds its taxable deficit in respect of the corporation, or
(c) if the affiliate has no exempt surplus, the amount, if any, by which its taxable surplus exceeds its exempt deficit in respect of the corporation,
as the case may be, at that time; (surplus net)
- taxable deficit
taxable deficit of a foreign affiliate of a corporation in respect of the corporation at any time is the amount, if any, by which
(a) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (vi) of the description of B in the definition taxable surplus in this subsection
exceeds
(b) the total of all amounts each of which is an amount determined at that time under any of subparagraphs (i) to (v) of the description of A in that definition; (déficit imposable)
- taxable earnings
taxable earnings of a foreign affiliate of a corporation for a taxation year of the affiliate is
(a) where the year is the 1975 or any preceding taxation year of the affiliate, nil, and
(b) in any other case, the total of all amounts each of which is
(i) the affiliate’s net earnings for the year from an active business carried on by it in a country,
(ii) the affiliate’s net earnings for the year in respect of its foreign accrual property income,
(iii) to the extent that they have not been included under subparagraph (i) or deducted in determining an amount included under subparagraph (b)(i) of the definition taxable loss in this subsection, the earnings for the year as determined under paragraph (b) of the definition earnings in this subsection minus 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 in respect of those earnings,
(iv) the affiliate’s net earnings for the year from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada), or
(v) the affiliate’s net earnings for the year from dispositions of shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which paragraph 95(2)(c), (d) or (e) of the Act was applicable) or dispositions of partnership interests that were excluded property of the affiliate,
but does not include any amount included in the affiliate’s exempt earnings for the year; (gains imposables)
- taxable loss
taxable loss of a foreign affiliate of a corporation for a taxation year of the affiliate is
(a) where the year is the 1975 or any preceding taxation year of the affiliate, nil, and
(b) in any other case, the total of all amounts each of which is
(i) the affiliate’s net loss for the year from an active business carried on by it in a country,
(ii) the affiliate’s net loss for the year in respect of foreign accrual property income,
(iii) the affiliate’s net loss for the year from dispositions of property used or held by it principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada), or
(iv) the affiliate’s net loss for the year from dispositions of shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which paragraph 95(2)(c), (d) or (e) of the Act was applicable) or dispositions of partnership interests that were excluded property of the affiliate,
but does not include any amount included in the affiliate’s exempt loss for the year; (perte imposable)
- taxable surplus
taxable surplus of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation is, at any particular time, the amount determined by the formula
A - B
in respect of the period beginning with the time that is the latest of
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) where the corporation is an acquiring corporation referred to in subsection 5905(5) and the subject affiliate is a particular affiliate referred to in that subsection or another foreign affiliate in which such a particular affiliate had an equity percentage at the time referred to in that subsection, the last time at which that subsection was applicable in respect of the subject affiliate, and
(c) where the subject affiliate is a foreign affiliate referred to in subsection 5905(1), (2), (8) or (9) or paragraph 5905(3)(b), the last time at which any of those subsections or that paragraph was applicable in respect of the subject affiliate
and ending with the particular time, where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening taxable surplus of the subject affiliate as determined under subsection 5905(1), (2), (3), (5), (8) or (9), at the time established in paragraph (a), (b) or (c),
(ii) the taxable earnings of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that was prescribed by paragraph 5900(1)(b) to have been paid out of the payer affiliate’s taxable surplus in respect of the corporation,
(iv) an amount added to the taxable surplus of the subject affiliate or deducted from its taxable deficit in the period and before the particular time under any provision of subsection (1.1) or (1.2),
(v) an amount added, in the period and before the particular time, to the subject affiliate’s taxable surplus under paragraph (7.1)(e), and
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the opening taxable deficit of the subject affiliate as determined under subsection 5905(1), (2), (3), (5), (8) or (9), at the time established in paragraph (a), (b) or (c),
(ii) the taxable loss of the subject affiliate for any of its taxation years ending in the period,
(iii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of that portion of a dividend referred to in subparagraph (iii) of the description of A,
(iv) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed by paragraph 5901(1)(b) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation,
(v) each amount that is determined under paragraph 5902(4)(b) or subparagraph 5905(2)(a)(ii), (6)(a)(ii) or (8)(a)(ii) in the period and before the particular time, or
(vi) an amount, in the period and before the particular time, deducted from the taxable surplus of the subject affiliate or added to its taxable deficit under any provision of subsection (1.1) or (1.2); (surplus imposable)
- underlying foreign tax
underlying foreign tax of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation is, at any particular time, the amount, determined by the formula
A - B
in respect of the period beginning with the time that is the latest of
(a) the first day of the taxation year of the subject affiliate in which it last became a foreign affiliate of the corporation,
(b) where the corporation is an acquiring corporation referred to in subsection 5905(5) and the subject affiliate is a particular affiliate referred to in that subsection or another foreign affiliate in which such a particular affiliate had an equity percentage at the time referred to in that subsection, the last time at which that subsection was applicable in respect of the subject affiliate, and
(c) where the subject affiliate is a foreign affiliate referred to in subsection 5905(1), (2), (8) or (9) or paragraph 5905(3)(b), the last time at which any of those subsections or that paragraph was applicable in respect of the subject affiliate
and ending with the particular time, where
- A
- is the total of all amounts, in respect of the period, each of which is
(i) the opening underlying foreign tax of the subject affiliate as determined under subsection 5905(1), (2), (3), (5), (8) or (9), at the time established in paragraph (a), (b) or (c),
(ii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of the taxable earnings of the subject affiliate for a taxation year ending in the period,
(iii) the portion of any income or profits tax referred to in subparagraph (iii) of the description of B in the definition taxable surplus in this subsection paid by the subject affiliate in respect of a dividend received from any other foreign affiliate of the corporation,
(iv) each amount that was prescribed by paragraph 5900(1)(d) to have been the foreign tax applicable to the portion of any dividend received in the period and before the particular time by the subject affiliate from another foreign affiliate of the corporation (including, for greater certainty, any dividend deemed by subsection 5905(7) to have been received by the subject affiliate) that was prescribed by paragraph 5900(1)(b) to have been paid out of the payer affiliate’s taxable surplus in respect of the corporation, or
(v) the amount by which the subject affiliate’s underlying foreign tax is required to be increased by any provision of subsection (1.1) or (1.2),
- B
- is the total of those of the following amounts that apply in respect of the period:
(i) the portion of any income or profits tax refunded by the government of a country to the subject affiliate that can reasonably be regarded as having been refunded in respect of the taxable loss of the subject affiliate for a taxation year ending in the period,
(ii) the underlying foreign tax applicable to any whole dividend paid by the subject affiliate in the period and before the particular time deemed by paragraph 5901(1)(b) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation before that time,
(iii) each amount that is required by paragraph 5902(4)(c) or subparagraph 5905(2)(a)(iii), (6)(a)(iii) or (8)(a)(iii) to be deducted in the period and before the particular time in computing the subject affiliate’s underlying foreign tax, or
(iv) the amount by which the subject affiliate’s underlying foreign tax is required to be decreased in the period and before the particular time by any provision of subsection (1.1) or (1.2); (montant intrinsèque d’impôt étranger)
- underlying foreign tax applicable
underlying foreign tax applicable in respect of a corporation to a whole dividend paid at any time on the shares of any class of the capital stock of a foreign affiliate of the corporation by the affiliate is the total of
(a) the proportion of the underlying foreign tax of the affiliate at that time in respect of the corporation that
(i) the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation
is of
(ii) the affiliate’s taxable surplus at that time in respect of the corporation, and
(b) except with respect to any whole dividend referred to in section 5902, in any case where throughout the taxation year of the affiliate in which the whole dividend was paid
(i) there is no more than one class of shares of the capital stock of the affiliate issued and outstanding,
(ii) the surplus entitlement percentage of the corporation in respect of the affiliate is 100 per cent, or
(iii) there is not more than one shareholder who owns shares of the capital stock of the affiliate,
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
(iv) 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
(v) the amount by which the underlying foreign tax of the affiliate 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)
- whole dividend
whole dividend paid at any time on the shares of a class of the capital stock of a foreign affiliate of a taxpayer resident in Canada is the total of all amounts each of which is the dividend paid at that time on a share of that class except that
(a) where a dividend is paid at the same time on shares of more than one class of the capital stock of an affiliate, for the purpose only of section 5900, the whole dividend referred to in section 5901 paid at that time on the shares of a class of the capital stock of the affiliate is deemed to be the total of all amounts each of which is the dividend paid at that time on a share of the capital stock of the affiliate,
(b) where a whole dividend is deemed by paragraph 5902(1)(c) to have been paid at the same time on shares of more than one class of the capital stock of an affiliate, for the purpose only of that paragraph, the whole dividend deemed to have been paid at that time on the shares of a class of the capital stock of the affiliate 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 capital stock of the affiliate, and
(c) where more than one whole dividend is deemed by paragraph 5900(2)(b) to have been paid at the same time on shares of a class of the capital stock of an affiliate, for the purposes only of paragraph 5900(1)(d) and the definitions underlying foreign tax and underlying foreign tax applicable in this subsection, the whole dividend deemed to have been paid at that time on the shares of a class of the capital stock of the affiliate 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 capital stock of the affiliate and all of that whole dividend shall be deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation. (dividende global)
(1.01) For the purpose of section 113 of the Act, exempt surplus and taxable surplus have the meanings assigned by subsection (1).
(1.02) In paragraph (d) of the definition exempt earnings in subsection (1), the determination of whether a corporation
(a) has a “qualifying interest” in respect of a foreign affiliate throughout a taxation year, or
(b) is related to another corporation throughout a taxation year
shall be made as it would for the purpose of paragraph 95(2)(a) of the Act.
(1.1) For the purposes of this Part, where, pursuant to the income tax law of a country other than Canada, a group of two or more foreign affiliates (in this subsection referred to as the “consolidated group”) of a corporation resident in Canada that are resident in that country determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis and one of the affiliates (in this subsection referred to as the “primary affiliate”) is responsible for paying, or claiming a refund of, such tax on behalf of itself and the other members of the consolidated group (hereinafter referred to as the “secondary affiliates”), the following rules apply:
(a) in respect of the primary affiliate,
(i) any such income or profits tax paid by the primary affiliate for the year shall be deemed not to have been paid and any refund to the primary affiliate of income or profits tax otherwise payable by it for the year shall be deemed not to have been made,
(ii) any such income or profits tax that would have been payable by the primary affiliate for the year if the primary affiliate had no other taxation year and had not been a member of the consolidated group shall be deemed to have been paid for the year,
(iii) to the extent that
(A) the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group is reduced by virtue of any loss of the primary affiliate for the year or any previous taxation year, or
(B) the primary affiliate receives, in respect of a loss of the primary affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the primary affiliate on behalf of the consolidated group,
the amount of such reduction or refund, as the case may be, shall be deemed to have been received by the primary affiliate as a refund for the year of the loss of income or profits tax in respect of the loss,
(iv) any such income or profits tax that would have been payable by a secondary affiliate for the year if the secondary affiliate had no other taxation year and had not been a member of the consolidated group shall at the end of the year,
(A) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the exempt earnings of the secondary affiliate, be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the primary affiliate, and
(B) to the extent that such income or profits tax would otherwise have reduced the net earnings included in the taxable earnings of the secondary affiliate,
(I) be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the primary affiliate, and
(II) be added to the underlying foreign tax of the primary affiliate,
(v) to the extent that
(A) the income or profits tax that would otherwise have been payable by the primary affiliate for the year on behalf of the consolidated group is reduced by virtue of a loss of a secondary affiliate for the year or a previous taxation year, or
(B) the primary affiliate receives, in respect of a loss of a secondary affiliate for the year or a subsequent taxation year, a refund of income or profits tax otherwise payable for the year by the primary affiliate on behalf of the consolidated group,
the amount of such reduction or refund, as the case may be, shall at the end of the year of the loss,
(C) where such loss reduces the exempt surplus or increases the exempt deficit, as the case may be, of the secondary affiliate, be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the primary affiliate, and
(D) where such loss reduces the taxable surplus or increases the taxable deficit, as the case may be, of the secondary affiliate,
(I) be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the primary affiliate, and
(II) be deducted from the underlying foreign tax of the primary affiliate; and
(b) where by virtue of the primary affiliate being responsible for paying, or claiming a refund of, income or profits tax for the year on behalf of the consolidated group,
(i) an amount is paid to the primary affiliate by a secondary affiliate in respect of the income or profits tax that would have been payable by the secondary affiliate for the year had it not been a member of the group,
(A) in respect of the secondary affiliate, the amount so paid shall be deemed to be a payment of such income or profits tax for the year, and
(B) in respect of the primary affiliate,
(I) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the exempt surplus or deducted from the exempt deficit, as the case may be, of the secondary affiliate shall at the end of the year be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the primary affiliate, and
(II) such portion of the amount so paid as may reasonably be regarded as relating to an amount included in the taxable surplus or deducted from the taxable deficit, as the case may be, of the secondary affiliate shall at the end of the year be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the primary affiliate and be deducted from the underlying foreign tax of the primary affiliate, or
(ii) an amount is paid by the primary affiliate to a secondary affiliate in respect of a reduction or refund by virtue of a loss 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) such portion of the amount so paid as may 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 of the loss be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the primary affiliate, and
(II) such portion of the amount so paid as may 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 of the loss 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 shall be deemed to be a refund to the secondary affiliate for the year of the loss of income or profits tax in respect of the loss,
and, for the purposes of this paragraph, any amount paid by a particular secondary affiliate to another secondary affiliate in respect of any income or profits tax that would have been payable by the particular secondary affiliate for the year had it not been a member of the consolidated group shall be deemed to have been paid in respect of such tax by the particular secondary affiliate to the primary affiliate and to have been paid in respect of such tax by the primary affiliate to the other secondary affiliate.
(1.2) For the purposes of this Part, where, pursuant to the income tax law of a country other than Canada, a corporation resident in that country that is a foreign affiliate of a corporation resident in Canada (in this subsection referred to as the “taxpaying affiliate”) deducts, in computing its income or profits tax payable for a taxation year to a government of that country, a loss of another corporation resident in that country that is a foreign affiliate of the corporation resident in Canada (in this subsection referred to as the “loss affiliate”), the following rules apply:
(a) any such income or profits tax paid by the taxpaying affiliate for the year shall be deemed not to have been paid;
(b) any such income or profits tax that would have been payable by the taxpaying affiliate for the year if the taxpaying affiliate had not been allowed to deduct such loss shall be deemed to have been paid for the year;
(c) to the extent that the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year is reduced by virtue of such loss, the amount of such reduction shall at the end of the year,
(i) where such loss reduces the exempt surplus or increases the exempt deficit, as the case may be, of the loss affiliate, be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the taxpaying affiliate, and
(ii) where such loss reduces the taxable surplus or increases the taxable deficit, as the case may be, of the loss affiliate,
(A) be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the taxpaying affiliate, and
(B) be deducted from the underlying foreign tax of the taxpaying affiliate; and
(d) where an amount is paid by the taxpaying affiliate to the loss affiliate in respect of the reduction, by virtue of such loss, of the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year,
(i) in respect of the taxpaying affiliate,
(A) such portion of the amount as may 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 loss affiliate shall at the end of the year be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the taxpaying affiliate, and
(B) such portion of the amount as may 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 loss affiliate shall at the end of the year be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the taxpaying affiliate and be added to the underlying foreign tax of the taxpaying affiliate, and
(ii) in respect of the loss affiliate, the amount shall be deemed to be a refund to the loss affiliate of income or profits tax in respect of the loss for the taxation year of the loss.
(1.3) For the purpose of paragraph (b) of the definition foreign accrual tax in subsection 95(1) of the Act,
(a) where, pursuant to the income tax law of the country in which a particular foreign affiliate is resident, the particular affiliate and one or more other corporations, each of which is resident in that country, determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis, any amount paid by the particular affiliate to any of the other corporations to the extent that it may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate in respect of a particular amount included in computing the taxpayer’s income by virtue of subsection 91(1) of the Act for a taxation year in respect of the particular affiliate, had the tax liability of the particular affiliate and the other corporations not been determined on a consolidated or combined basis, is hereby prescribed to be foreign accrual tax applicable to the particular amount; and
(b) where, pursuant to the income tax law of the country in which a particular foreign affiliate of a taxpayer is resident, the particular affiliate, in computing its income or profits subject to tax in that country for a taxation year, deducts an amount in respect of a loss of another corporation resident in that country, any amount paid by the particular affiliate to the other corporation to the extent that it may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate in respect of a particular amount included in computing the taxpayer’s income by virtue of subsection 91(1) of the Act for a taxation year in respect of the particular affiliate, had the tax liability of the particular affiliate been determined without deducting the loss of the other corporation, is hereby prescribed to be foreign accrual tax applicable to the particular amount.
(2) In computing the earnings of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business carried on by it in a country, there shall be added to the amount thereof determined under subparagraph (a)(i) or (ii) of the definition earnings in subsection (1) (in this subsection referred to as the “earnings amount”) such portion of the following amounts as was deducted or was not included, as the case may be, in computing the earnings amount,
(a) any income or profits tax paid to the government of a country by the affiliate so deducted,
(b) if established by the taxpayer, the amount by which any amount so deducted in respect of an expenditure made by the affiliate exceeds the amount, if any, by which
(i) the amount of the expenditure
exceeds
(ii) the aggregate of all other deductions in respect of that expenditure made by the affiliate in computing the earnings amounts for preceding taxation years,
(c) any loss of the affiliate referred to in the description of D in the definition foreign accrual property income in subsection 95(1) of the Act so deducted,
(d) any capital loss of the affiliate in respect of the disposition of capital property so deducted (for greater certainty, capital property of the affiliate for the purposes of this paragraph includes all the property of the affiliate other than property referred to in subparagraph 39(1)(b)(i) or (ii) of the Act on the assumption for this purpose that the affiliate is a corporation resident in Canada),
(e) any loss of the affiliate for a preceding or a subsequent taxation year so deducted,
(f) any revenue, income or profit (other than an amount referred to in paragraph (f.1), (h) or (i)) of the affiliate derived in the year from such business carried on in that country to the extent that such revenue, income or profit
(i) is not otherwise required to be included in computing the earnings amount of the affiliate for any taxation year by the income tax law that is relevant in computing that amount, and
(ii) does not arise with respect to a disposition (other than a disposition to which subsection (9) applies) by the affiliate of property to another foreign affiliate of the taxpayer or to a person with whom the taxpayer does not deal at arm’s length, to which a tax deferral, rollover or similar tax postponement provision of the income tax law that is relevant in computing the earnings amount of the affiliate applied, and
(f.1) any assistance from a government, municipality or other public authority (other than any such assistance that reduced the amount of an expenditure for purposes of computing the earnings amount for any taxation year) that the affiliate received or became entitled to receive in the year in connection with such business carried on in that country that is not otherwise required to be included in computing the earnings amount for the year or for any other taxation year,
and there shall be deducted such portion of the following amounts as were included or were not deducted, as the case may be, in computing the earnings amount,
(g) any income or profits tax refunded by the government of a country to the affiliate so included;
(h) any capital gain of the affiliate in respect of the disposition of capital property so included (for greater certainty, capital property of the affiliate for the purposes of this paragraph includes all the property of the affiliate other than property referred to in any of subparagraphs 39(1)(a)(i) to (iv) of the Act on the assumption for this purpose that the affiliate is a corporation resident in Canada);
(i) any amount that is included in the foreign accrual property income of the affiliate so included;
(j) any loss, outlay or expense made or incurred in the year by the affiliate for the purpose of gaining or producing such earnings amount to the extent that
(i) such loss, outlay or expense is not otherwise permitted to be deducted in computing the earnings amount of the affiliate for any taxation year by the income tax law that is relevant in computing that amount, or
(ii) such outlay or expense can reasonably be regarded as applicable to any revenue added to the earnings amount of the affiliate under paragraph (f),
where such loss, outlay or expense
(iii) does not arise with respect to a disposition (other than a disposition to which subsection (9) applies) by the affiliate of property to another foreign affiliate of the taxpayer or to a person with whom the taxpayer does not deal at arm’s length, to which a loss deferral or similar loss postponement provision of the income tax law that is relevant in computing the earnings amount of the affiliate applied, and
(iv) is not
(A) a loss referred to in paragraph (c) or (d),
(B) a capital expenditure other than interest, or
(C) income or profits tax paid to the government of a country;
(k) any outlay made in the year in repayment of an amount referred to in paragraph (f.1); and
(l) where any property of the affiliate acquired from another foreign affiliate of the taxpayer or from any foreign affiliate of a person resident in Canada with whom the taxpayer does not deal at arm’s length has been disposed of, such amount in respect of that property as may reasonably be considered as having been included by virtue of paragraph (f) in computing the earnings amount of any foreign affiliate of the taxpayer or of a person resident in Canada with whom the taxpayer does not deal at arm’s length.
(2.1) In computing the earnings of a foreign affiliate of a corporation resident in Canada for a taxation year of the affiliate from an active business carried on by it in Canada or in a designated treaty country, where the affiliate is resident in a designated treaty country and the corporation, together with all other corporations resident in Canada with which the corporation does not deal at arm’s length and in respect of which the affiliate is a foreign affiliate, have so elected in respect of the business for the taxation year or any preceding taxation year of the affiliate, the following rules apply:
(a) there shall be added to the amount determined under subparagraph (a)(i) of the definition earnings in subsection (1) after adjustment in accordance with the provisions of subsection (2) (in this subsection and in subsection (2.2) referred to as the “adjusted earnings amount”) the total of all amounts each of which is the amount, if any, by which
(i) the amount that can reasonably be regarded as having been deducted in respect of the cost of a capital property or foreign resource property of the affiliate in computing the adjusted earnings amount
exceeds
(ii) the amount that may reasonably be regarded as having been deducted in respect of the cost of that capital property or foreign resource property in computing income or profit of the affiliate for the year from that business in its financial statements prepared in accordance with the laws of the country in which the affiliate is resident;
(b) there shall be deducted from the adjusted earnings amount the aggregate of all amounts each of which is the amount, if any, by which
(i) the amount determined under subparagraph (a)(ii) in respect of that capital property or foreign resource property
exceeds
(ii) the amount determined under subparagraph (a)(i) in respect of that capital property or foreign resource property;
(c) where any capital property or foreign resource property of the affiliate has been disposed of in the taxation year,
(i) there shall be added to the adjusted earnings amount the aggregate of the amounts deducted pursuant to paragraphs (b) and (2.2)(b) for preceding taxation years of the affiliate in respect of that capital property or foreign resource property, and
(ii) there shall be deducted from the adjusted earnings amount the aggregate of the amounts added pursuant to paragraphs (a) and (2.2)(a) for the preceding taxation years of the affiliate in respect of that capital property or foreign resource property; and
(d) for the purposes of paragraph (c), where the affiliate has merged with one or more corporations to form a new corporation, any capital property or foreign resource property of the affiliate that becomes a property of the new corporation shall be deemed to have been disposed of by the affiliate in its last taxation year before the merger.
(2.2) Where the taxation year of a foreign affiliate of a particular corporation resident in Canada for which the particular corporation has made an election under subsection (2.1) in respect of an active business carried on by the affiliate is not the first taxation year of the affiliate in which it carried on the business and in which it was a foreign affiliate of the particular corporation or of another corporation resident in Canada with which the particular corporation was not dealing at arm’s length at any time (hereinafter referred to as the “non-arm’s length corporation”), in computing the earnings of the affiliate from the business for the taxation year for which the election is made, the following rules, in addition to those set out in subsection (2.1), apply:
(a) there shall be added to the adjusted earnings amount the aggregate of all amounts each of which is an amount that would have been determined under paragraph (2.1)(a) or subparagraph (2.1)(c)(i)
(i) for any preceding taxation year of the affiliate in which it was a foreign affiliate of the particular corporation if the particular corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the particular corporation and carried on the business, and
(ii) for any preceding taxation year of the affiliate (other than a taxation year referred to in subparagraph (i)) in which it was a foreign affiliate of the non-arm’s length corporation if the non-arm’s length corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the non-arm’s length corporation and carried on the business; and
(b) there shall be deducted from the adjusted earnings amount the aggregate of all amounts each of which is an amount that would have been determined under paragraph (2.1)(b) or subparagraph (2.1)(c)(ii)
(i) for any preceding taxation year of the affiliate in which it was a foreign affiliate of the particular corporation if the particular corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the particular corporation and carried on the business, and
(ii) for any preceding taxation year of the affiliate (other than a taxation year referred to in subparagraph (i)) in which it was a foreign affiliate of the non-arm’s length corporation if the non-arm’s length corporation had made an election under subsection (2.1) for the first taxation year of the affiliate in which it was a foreign affiliate of the non-arm’s length corporation and carried on the business.
(2.3) For the purposes of this subsection and subsections (2.1) and (2.2), where an election under subsection (2.1) has been made by a corporation resident in Canada (in this subsection and in subsection (2.4) referred to as the “electing corporation”) in respect of an active business of a foreign affiliate of the electing corporation and the affiliate subsequently becomes a foreign affiliate of another corporation resident in Canada (in this subsection and in subsection (2.4) referred to as the “subsequent corporation”) that does not deal at arm’s length with the electing corporation, in computing the earnings of the affiliate from such business in respect of the subsequent corporation for any taxation year of the affiliate ending after the affiliate so became a foreign affiliate of the subsequent corporation, the subsequent corporation shall be deemed to have made an election under subsection (2.1) in respect of the business of the affiliate for the first such taxation year and for the purposes of paragraph (2.1)(d), the earnings of the affiliate for all of the preceding taxation years shall be deemed to have been adjusted in accordance with subsections (2.1) and (2.2) in the same manner as if the subsequent corporation had been the electing corporation.
(2.4) For the purposes of subsection (2.3)
(a) a corporation formed as a result of a merger, to which section 87 of the Act applies, of the electing corporation and one or more other corporations, or
(b) a corporation that has acquired shares of the capital stock of a foreign affiliate, in respect of which an election under subsection (2.1) has been made, from the electing corporation in a transaction in respect of which an election under section 85 of the Act was made
shall be deemed to be a subsequent corporation that does not deal at arm’s length with the electing corporation.
(2.5) [Repealed, SOR/97-505, s. 8]
(2.6) A corporation resident in Canada, and all other corporations resident in Canada with which the corporation does not deal at arm’s length, shall each be considered to have elected under subsection (2.1) in respect of an active business carried on by a non-resident corporation that is a foreign affiliate of each such corporation for a taxation year if there is filed with the Minister on or before the day that is the later of
(a) June 30, 1986, and
(b) the earliest of the days on or before which any one of the said corporations is required to file a return of income pursuant to section 150 of the Act for its taxation year following the taxation year in which the taxation year of the affiliate in respect of which the election is made ends,
the following information:
(c) a description of the active business sufficient to identify the business; and
(d) a statement on behalf of each such corporation, signed by an authorized official of the corporation on behalf of which the statement is made, that the corporation is electing under subsection (2.1) in respect of the business.
(2.7) Notwithstanding any other provision of this Part, where
(a) an amount is included in computing the income or loss from an active business of a particular foreign affiliate of a taxpayer for a particular taxation year under subparagraph 95(2)(a)(i) or (ii) of the Act, and
(b) the amount included is in respect of an amount paid or payable (other than an amount paid or payable that is described in clause 95(2)(a)(ii)(D) of the Act) by another non-resident corporation described in subparagraph 95(2)(a)(i) or (ii) of the Act or by a partnership of which such a corporation is a member,
the amount (in respect of which an amount was included in the income or loss from an active business of the particular affiliate for the particular year) paid or payable by the non-resident corporation or the partnership shall, except where it has been deducted under paragraph (2)(j) in computing the non-resident corporation’s earnings or loss from an active business, be deducted in computing the earnings or loss of the non-resident corporation or the partnership, as the case may be, from the active business for its earliest taxation year in which the amount was paid or payable and shall not be deducted in computing its earnings or loss from the active business for any other taxation year.
(2.8) Notwithstanding any other provision of this Part, where
(a) an amount is included in computing the income from an active business of a particular foreign affiliate of a taxpayer or a person related to the taxpayer for a particular taxation year under clause 95(2)(a)(ii)(D) of the Act, and
(b) the amount included is in respect of an amount of interest paid or payable by another non-resident corporation (in this subsection referred to as the “second affiliate”) to which the particular affiliate and the taxpayer are related
the following rules apply:
(c) that amount of interest shall be deducted in computing the second affiliate’s income or loss, from an active business carried on by it in a country in which it is resident and subject to income taxation, for its earliest taxation year in which the amount was paid or payable,
(d) the second affiliate is deemed to have carried on an active business in a country in which it was resident and subject to income taxation for each taxation year referred to in paragraph (c) in which such an active business was not otherwise carried on by it, and
(e) in computing the second affiliate’s income for a taxation year from any source, no amount shall be deducted in respect of an amount paid or payable by it that is referred to in paragraph (c) except as is required under that paragraph.
(2.9) In computing the earnings from an active business of a foreign affiliate of a corporation resident in Canada for the affiliate’s taxation year immediately before the particular taxation year of the affiliate referred to in paragraph 95(2)(k) of the Act,
(a) there shall be added to the amount determined under subparagraph (a)(i) or (ii) of the definition earnings in subsection (1) after adjustment in accordance with subsections (2), (2.1) and (2.2) the total of
(i) the amount, if any, by which the total determined in respect of the affiliate in clause (b)(i)(B) for the year exceeds the total determined in respect of the affiliate in clause (b)(i)(A) for the year,
(ii) where, at the end of the year, the affiliate was deemed because of paragraphs 95(2)(k) and 138(11.91)(e) of the Act to have disposed of property owned by it that was used or held by it in the course of carrying on the active business in the year, the amount that is the total of all amounts each of which is the amount, if any, by which
(A) the lesser of the fair market value and the cost to the affiliate at the end of the year of a capital property (referred to in this subparagraph and subparagraph (b)(ii) as a “particular depreciable asset”) owned by it that
(I) was used or held by it in the course of carrying on the active business in the year,
(II) was deemed because of paragraphs 95(2)(k) and 138(11.91)(e) of the Act to have been disposed of at the end of the year, and
(III) was property in respect of the cost of which amounts were, at any time, deductible in computing the earnings from the active business under subparagraph (a)(i) or (ii) of the definition earnings in subsection (1)
exceeds
(B) the amount, if any, by which the cost to the affiliate of the particular depreciable asset exceeds the total of all amounts each of which is an amount that can reasonably be regarded as having been deducted in respect of the cost of the particular depreciable asset in computing the earnings (as would be defined in subsection (1) if that definition were read as if the reference in that definition to this subsection did not exist) of the affiliate from the active business in the year or in any preceding taxation year of the affiliate in which it was a foreign affiliate of the corporation or of another corporation resident in Canada with which the corporation was not dealing with at arm’s length at any time, and
(iii) where, at the end of the year, the affiliate was deemed because of paragraphs 95(2)(k) and 138(11.91)(e) of the Act to have disposed of property (other than capital property) owned by it that was used or held by it in the course of carrying on the active business in the year, the amount that is the total of all amounts each of which is an amount, if any, by which the fair market value of such a property exceeds the cost to the affiliate of the property at the time that is immediately before the end of the year; and
(b) there shall be deducted from the amount determined under subparagraph (a)(i) or (ii) of the definition earnings in subsection (1) after adjustment in accordance with subsections (2), (2.1) and (2.2) the total of
(i) the amount, if any, by which
(A) the total of all amounts each of which is a maximum amount deemed because of paragraphs 95(2)(k) and 138(11.91)(d) of the Act to have been claimed under subparagraphs 138(3)(a)(i), (ii) and (iv) and paragraphs 20(1)(l) and (l.1) and 20(7)(c) of the Act (each of which provisions is referred to in this subparagraph as a “reserve provision”) in the year
exceeds
(B) the total of all amounts each of which is an amount actually claimed by the affiliate as a reserve in the year that can reasonably be considered to be in respect of amounts in respect of which a reserve could have been claimed under a reserve provision on the assumption that the affiliate could have claimed amounts in respect of the reserve provisions in the year,
(ii) the amount that is the total of all amounts each of which is the amount, if any, by which the amount determined under clause (a)(ii)(B) in respect of a particular depreciable asset described in clause (a)(ii)(A) exceeds the fair market value of the particular depreciable asset at the end of the year, and
(iii) where, at the end of the year, the affiliate was deemed because of paragraphs 95(2)(k) and 138(11.91)(e) of the Act to have disposed of property (other than capital property) owned by it that was used or held by it in the course of carrying on the active business in the year, the amount that is the total of all amounts each of which is an amount, if any, by which the cost to the affiliate of such a property at the time that is immediately before the end of the year exceeds the fair market value of the property at the end of the year.
(3) For the purposes of this Part, any corporation that was, on January 1, 1972, a foreign affiliate of a taxpayer shall be deemed to have become a foreign affiliate of the taxpayer on that day.
(4) For the purposes of this Part, government of a country includes the government of a state, province or other political subdivision of that country.
(5) For the purposes of this section, each capital gain and each 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), where 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.
(5.1) Notwithstanding subsection (5) and except as provided in subsection (9), where, under the income tax law of a country other than Canada that is relevant in computing the earnings of a foreign affiliate of a taxpayer resident in Canada from an active business carried on by it in a country, no gain or loss is recognized in respect of a disposition by the affiliate of a capital property used or held principally for the purpose of gaining or producing income from an active business to a person (in this subsection referred to as the “transferee”) that is another foreign affiliate of the taxpayer or that is a foreign affiliate of another person with whom the taxpayer does not deal at arm’s length, for the purposes of this section,
(a) the affiliate’s proceeds of disposition of the property shall be deemed to be an amount equal to the aggregate of the adjusted cost base to the affiliate of the property immediately before the disposition and any outlays and expenses to the extent they were made or incurred by the affiliate for the purpose of making the disposition;
(b) the cost to the transferee of the property acquired from the affiliate shall be deemed to be an amount equal to the affiliate’s proceeds of disposition, as determined under paragraph (a); and
(c) the transferee shall be deemed to have acquired the property on the date that it was acquired by the affiliate.
(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 itself resident or such currency, other than Canadian currency, as is reasonable in the circumstances.
(7) For the purposes of this Part, the amount of any stock dividend paid by a foreign affiliate of a corporation resident in Canada on a share of a class of its capital stock shall be deemed to be nil.
(7.1) Where, at any time in a taxation year of a corporation resident in Canada, a foreign affiliate of the corporation (in this subsection referred to as the “payor affiliate”) pays a dividend on the shares of any class of its capital stock to the corporation (in this subsection referred to as the “particular dividend”) and as a result of the payment the corporation is entitled to a tax credit from the government of the country in which the payor affiliate is resident,
(a) if the particular dividend was paid on or after the day on which this subsection comes into force, or
(b) if the particular dividend was paid before the day on which this subsection comes into force and in a taxation year commencing after 1978 and the corporation elects in respect of the tax credit in its return of income for the 1985, 1986, 1987, 1988 or 1989 taxation year required to be filed pursuant to subsection 150(1) of the Act,
for the purpose of this Part, the following rules apply:
(c) the tax credit shall be deemed to be a dividend paid at that time by the payor affiliate on the shares of that class of its capital stock to the corporation,
(d) immediately before that time there shall be added to the exempt surplus of the payor affiliate an amount equal to the proportion of the tax credit that
(i) the portion of the particular dividend that would, were the corporation not entitled to the tax credit, be deemed by subsection 5900(1) to have been paid out of the payor affiliate’s exempt surplus in respect of the corporation
is of
(ii) the particular dividend,
(e) immediately before that time, there shall be added to the taxable surplus of the payor affiliate an amount equal to the proportion of the tax credit that
(i) the portion of the particular dividend that would, were the corporation not entitled to the tax credit, be deemed by subsection 5900(1) to have been paid out of the payor affiliate’s taxable surplus in respect of the corporation
is of
(ii) the particular dividend, and
(f) the foreign tax applicable to the aggregate of
(i) the portion of the particular dividend determined under subparagraph (e)(i), and
(ii) the portion of any amount deemed to be a dividend by virtue of paragraph (c) that is deemed by subsection 5900(1) to have been paid out of the payor affiliate’s taxable surplus in respect of the corporation
shall, notwithstanding paragraph 5900(1)(d), be equal to the amount determined under paragraph 5900(1)(d) in respect of the amount referred to in subparagraph (i), less the amount determined under paragraph (e).
(8) For the purposes of computing the various amounts referred to in this section, the first taxation year of a foreign affiliate formed as a result of a merger in the manner described in subsection 5905(3) shall be deemed to have commenced at the time of the merger, and a taxation year of a predecessor corporation (within the meaning assigned by subsection 5905(3)) that would otherwise have ended after the merger shall be deemed to have ended immediately before the merger.
(9) Where a foreign affiliate of a taxpayer resident in Canada has been dissolved and paragraph 95(2)(e.1) of the Act does not apply, for the purpose of computing the various amounts referred to in this section, the following rules apply:
(a) where, at a particular time in the course of the dissolution, all or substantially all of the property owned by the affiliate immediately before that time was distributed to the shareholders of the affiliate, the taxation year of the affiliate that otherwise would have included the particular time shall be deemed to have ended immediately before the particular time;
(b) except as provided in paragraph 88(3)(a) and subparagraph 95(2)(e)(i) of the Act,
(i) each property of the affiliate that was distributed to the shareholders in the course of the dissolution shall be deemed to have been disposed of immediately before the end of the affiliate’s taxation year deemed to have ended by paragraph (a) for proceeds of disposition equal to the fair market value thereof immediately before the particular time, and
(ii) each property of the affiliate that was otherwise disposed of in the course of the dissolution shall be deemed to have been disposed of by the affiliate for proceeds of disposition equal to the fair market value thereof at the time of disposition; and
(c) except as provided in subparagraph 95(2)(e)(i) of the Act, each property of the dissolved affiliate that was disposed of or distributed in the course of the dissolution to another foreign affiliate of the taxpayer resident in Canada shall be deemed to have been acquired by that other foreign affiliate at a cost equal to the proceeds of disposition of that property to the dissolved affiliate, as determined in paragraph (b).
(10) Where
(a) the net earnings or net loss for a taxation year of a foreign affiliate of a corporation resident in Canada from an active business carried on in a country other than Canada would otherwise be included in the affiliate’s taxable earnings or taxable loss, as the case may be, for the year,
(b) the rate of the income or profits tax to which any earnings of that active business of the affiliate are subjected by the government of that country is, by virtue of a special exemption from or reduction of tax (other than an export incentive) that is provided under a law of such country to promote investments or projects in pursuance of a program of economic development, less than the rate of such tax that would, but for such exemption or reduction, be paid by the affiliate, and
(c) the affiliate qualified for such exemption from or reduction of tax in respect of an investment made by it in that country before January 1, 1976 or in respect of an investment made by it or a project undertaken by it in that country pursuant to an agreement in writing entered into before January 1, 1976,
for the purposes of this Part, such net earnings or net loss shall be included in the affiliate’s exempt earnings or exempt loss, as the case may be, for the year and not in the affiliate’s taxable earnings or taxable loss, as the case may be, for the year.
(11) For the purposes of this Part, a sovereign state or other jurisdiction is a designated treaty country for a taxation year of a foreign affiliate of a corporation if Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income, or a comprehensive tax information exchange agreement, in respect of that sovereign state or jurisdiction, that has entered into force and has effect for that taxation year, but any territory, possession, department, depend- ency or area of that sovereign state or jurisdiction to which that agreement or convention does not apply is not considered to be part of that sovereign state or jurisdiction for the purpose of determining whether it is a designated treaty country.
(11.1) For the purpose of subsection (11), where a comprehensive agreement or convention between Canada and another country for the elimination of double taxation on income has entered into force, that convention or agreement is deemed to have entered into force and have effect in respect of a taxation year of a foreign affiliate of a corporation any day of which is in the period that begins on the day on which the agreement or convention was signed and that ends on the last day of the last taxation year of the affiliate for which the agreement or convention is effective.
(11.11) For the purpose of applying subsection (11) in respect of a foreign affiliate of a corporation, where a comprehensive tax information exchange agreement enters into force on a particular day, the agreement is deemed to enter into force and to come into effect on the first day of the foreign affiliate’s taxation year that includes the particular day.
(11.2) For the purposes of this Part, a foreign affiliate of a corporation is, at any time, deemed not to be resident in a country with which Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income unless
(a) the affiliate is, at that time, a resident of that country for the purpose of the agreement or convention;
(b) the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention if the affiliate were treated, for the purpose of income taxation in that country, as a body corporate;
(c) where the agreement or convention entered into force before 1995, the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention but for a provision in the agreement or convention that has not been amended after 1994 and that provides that the agreement or convention does not apply to the affiliate; or
(d) the affiliate would, at that time, be a resident of that country, as provided by paragraph (a), (b) or (c) if the agreement or convention had entered into force.
(12) For the purposes of paragraph 95(2)(j) of the Act, the adjusted cost base to a foreign affiliate of a taxpayer of an interest in a partnership at any time is prescribed to be the cost thereof otherwise determined at that time except that
(a) there shall be added to that cost such of the following amounts as are applicable, namely,
(i) any amount included in the earnings of the affiliate for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to profits of the partnership,
(ii) the affiliate’s incomes as described by the description of “A” in the definition foreign accrual property income in subsection 95(1) of the Act for a taxation year ending after 1971 and before that time that can reasonably be considered to relate to profits of the partnership,
(iii) any amount included in computing the exempt earnings or taxable earnings, as the case may be, of the affiliate for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to a capital gain of the partnership,
(iv) where the affiliate has, at any time before that time and in a taxation year ending after 1971, made a contribution of capital to the partnership otherwise than by way of a loan, such part of the amount of the contribution as cannot reasonably be regarded as a gift made to or for the benefit of any other member of the partnership who was related to the affiliate, and
(v) such portion of any income or profits tax refunded before that time by the government of a country to the partnership as may reasonably be regarded as tax refunded in respect of an amount described in any of subparagraphs (b)(i) to (iii), and
(b) there shall be deducted from that cost such of the following amounts as are applicable, namely,
(i) any amount included in the loss of the affiliate for a taxation year ending after 1971 that may reasonably be considered to relate to a loss of the partnership,
(ii) the affiliate’s losses as described by the description of D in the definition foreign accrual property income in subsection 95(1) of the Act for a taxation year ending after 1971 and before that time that can reasonably be considered to relate to the losses of the partnership,
(iii) any amount included in computing the exempt loss or taxable loss, as the case may be, of the affiliate for a taxation year ending after 1971 and before that time that may reasonably be considered to relate to a capital loss of the partnership,
(iv) any amount received by the affiliate before that time and in a taxation year ending after 1971 as, on account or in lieu of payment of, or in satisfaction of, a distribution of his share of the partnership profits or partnership capital, and
(v) such portion of any income or profits tax paid before that time to the government of a country by the partnership as may reasonably be regarded as tax paid in respect of an amount described in any of subparagraphs (a)(i) to (iii),
and, for greater certainty, where any interest of a foreign affiliate in a partnership was reacquired by the affiliate after having been previously disposed of, no adjustment that was required to be made under this subsection before such reacquisition shall be made under this subsection to the cost to the affiliate of the interest as reacquired property of the affiliate.
(13) For the purpose of subparagraph 128.1(1)(d)(ii) of the Act, the amount prescribed to be included in the foreign accrual property income of a foreign affiliate of a taxpayer for a taxation year is the amount, if any, by which
(a) the taxable surplus of the affiliate in respect of the taxpayer at the end of the year other than the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income
exceeds the total of
(b) the amount determined by the formula
(A - B) x (C - 1)
where
- A
- is the total of the underlying foreign tax of the affiliate in respect of the taxpayer at the end of the year and the amount, to the extent that it is not otherwise included in that underlying foreign tax, that would have been added to that underlying foreign tax if each disposition deemed by paragraph 128.1(1)(b) of the Act had been an actual disposition,
- B
- is the part of the value of A that can reasonably be considered to relate to the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income, and
- C
- is the relevant tax factor, as defined in subsection 95(1) of the Act, and
(c) the amount, if any, by which
(i) the total of all amounts required by paragraph 92(1)(a) of the Act to be added at any time in a preceding taxation year in computing the adjusted cost base to the taxpayer of the shares of the affiliate owned by the taxpayer at the end of the year
exceeds
(ii) the total of all amounts required by paragraph 92(1)(b) of the Act to be deducted at any time in a preceding taxation year in computing the adjusted cost base to the taxpayer of the shares of the affiliate owned by the taxpayer at the end of the year.
- [NOTE: Application provisions are not included in the consolidated text
- see relevant amending Acts and regulations.]
- SOR/78-211, s. 1
- SOR/78-913, s. 2
- SOR/80-141, s. 5
- SOR/85-176, s. 4
- SOR/88-165, s. 29(F)
- SOR/89-135, s. 3
- SOR/94-686, ss. 31(F), 58(F)
- 69(F), 70(F), 78(F), 79(F)
- SOR/96-228, s. 2
- SOR/97-505, s. 8
- 2009, c. 2, s. 112
- Date modified: