The test under s. 91(4.1) is deemed by s. 91(4.7) to be met if, under relevant foreign law, dividends on shares held by specified owner are treated as interest or another form of deductible payment. Under Brazilian law, corporations can choose to make tax deductible distributions (“interest on equity” or IOE) to shareholders. Do such distributions come within s. 91(4.7)?
CRA indicated that the conditions for the application of s. 91(4.7) are met in a taxation year of a Brazilian foreign affiliate if, at any time in that year, dividends paid to a specified owner (no matter the amount) are deductible by the paying corporation under Brazilian tax law by virtue of an IOE election. Thus, the application of s. 91(4.7) would result in the denial under s. 91(4.1) of FAT applicable to foreign accrual property income of that Brazilian foreign affiliate for that year of the dividend. If the Brazilian affiliate had a chain of other foreign affiliates under it, that could also by reason of the chain rules result in the denial of FAT in respect of FAPI for those underlying subsidiaries – or for subsidiaries up above, as well.