S. 84.1(2.3)(b) appears to be targeted at reducing the capital gains deduction calculated under ss. 110.6(2) or (2.1) based on the taxable capital employed in Canada by the corporation, but the rule only applies for purposes of s. 84.1(2)(e) and would therefore not appear to be effective in reducing the capital gains deduction available to any taxpayer. In confirming this interpretation, CRA stated:
[P]aragraph 84.1(2.3)(b) … does not apply for the purposes of section 110.6 … and, therefore, it does not reduce a taxpayer’s capital gains deduction. In addition, paragraph 84.1(2.3)(b) … does not otherwise affect a taxpayer’s ability to rely on the deeming rule in paragraph 84.1(2)(e) … .