CROSS-SHAREHOLDINGS BETWEEN A SHAREHOLDER AND A FOREIGN AFFILIATE
QUESTION
As a result of a U.S. reorganization, a Canadian subsidiary ("Canco") of a U.S. corporation owns shares in its U.S. parent. In the event the parent is a foreign affiliate of the subsidiary, would a taxable dividend received by the U.S. parent from the subsidiary be added in computing the exempt surplus of the U.S. parent in respect of its Canadian subsidiary pursuant to subparagraph 5907(1)(d)(vii) of the Regulations to the Act? Canco is a taxable Canadian corporation.
DEPARTMENT'S POSITION
Subparagraph 5907(1)(d)(vii) of the Regulations to the Act provides that the "portion of any taxable dividend received...by the affiliate that would, if the dividend were received by the corporation, be deductible by it under section 112 of the Act" may be added to the exempt surplus of a foreign affiliate of a corporation in respect of the corporation. As it is not possible for Canco to receive a dividend it itself has paid, it is our view such dividends would not satisfy the test in subparagraph 5907(1)(d)(vii) of the Regulations to the Act and therefore could not be included in computing the exempt surplus of the U.S. parent corporation in respect of Canco.
Prepared by: O. LaurikainenDate: January 15, 1992