Assume that Canco owns all the shares of FA. FA has $100 of taxable surplus ("TS"), no exempt surplus and no underlying foreign tax (UFT) balances. The TS is attributable to foreign accrual property income ("FAPI") of FA and has been fully included in the income of Canco and the ACB of FA's shares. Assume that FA makes a $100 loan to Canco and the "specified amount" in respect of the loan is included in Canco's income pursuant to proposed s. 90(6). Will a reserve be available to Canco pursuant to the provisions of proposed s. 90(9)?
Response
In this scenario, no amount is included in the reserve under proposed s. 90(9)(a)(ii) in respect of previously taxed FAPI, because the specified debtor is Canco (which is not a person described in proposed s. 90(9)(a)(i)(D)(I) or (II)). Furthermore, no deduction could be made under s. 90(9)(a)(i)(C) because FA has no UFT, and no deduction could be made under s. 90(9)(a)(i)(D) because no portion of the notional dividend was out of FA's pre-acquisition surplus. However, the ACB of Canco's shares of FA is increased as a result of the inclusion in respect of the FAPI of FA; and the suppression election in proposed Reg. 5901(2)(b) allows a taxpayer to have the whole dividend deemed to be paid out of pre-acquisition surplus. Since Canco would have been in a position to make the suppression election to deem the dividend to be paid out of pre-acquisition surplus, it is CRA's view that:
for the purposes of proposed subsection 90(9) an amount may "reasonably be considered to have been deductible" in respect of the dividend under paragraph 113(1)(d). Therefore an amount would be included in the subsection 90(9) reserve under proposed clause 90(9)(a)(i)(D).