Canco, which did not prepare a detailed calculation of its exempt surplus, hybrid surplus and taxable surplus accounts, nor of its hybrid underlying tax and underlying foreign tax accounts in respect of FA. FA claimed a s. 113(1) deduction equalling the amount of a dividend received from a wholly-owned foreign affiliate (“FA”) based on the general ordering rules in Regs. 5900(1) and 5901(1). Should a more careful review indicate that the dividend was not otherwise fully sheltered by the 113 Deduction, Canco would wish to utilize the adjusted cost base (“ACB”) of the FA shares.
Are detailed surplus account computations essential to support the s. 113 deduction? In responding affirmatively, CRA stated:
If a taxpayer does not submit complete computations of surplus to the CRA, the general practice of the CRA is to refuse the deduction claimed under subsection 113(1).
Furthermore, taxpayers are also responsible for documenting their own affairs in a reasonable manner. In that regard, subsection 230(1) expressly provides that they must keep records and books of account in such form and containing such information as will enable the taxes payable under the Income Tax Act to be determined.