Regarding a request for additional guidance on the documentation required in light of the CRA position noted at 5 May 2019 IFA Roundtable Q.9, 2019-0798761C6 that “[i]f complete surplus computations are not provided to the CRA, the current CRA general practice is to deny the deduction under subsection 113(1)” (even if the shares of the foreign affiliate had sufficient ACB (a.k.a., pre-acquisition surplus) to cover any deficiencies in its other surplus), CRA stated:
Even if the determination of tax payable by a taxpayer in a given year does not rely on surplus balances, accurate surplus account balances of a foreign affiliate with respect to a taxpayer should be prepared by the taxpayer on an annual basis, and relevant books, records, documents and information to support such surplus accounts balances should be retained. Each component of the surplus accounts must be validated by appropriate documentation and such documentation should be maintained and retained accordingly. If documentation is not available to accurately support surplus account calculations at the time surplus is utilized, any deduction claimed based on surplus account balances will be denied and other adjustments may also be required. …
What constitutes appropriate documentation depends on the specific facts and circumstances, but may include:
- non-consolidated financial statements of the foreign affiliate,
- trial balance of the foreign affiliate,
- complete minute books of the foreign affiliate,
- income tax returns and all relevant supporting schedules for the income tax returns of the foreign affiliate,
- support for income tax paid by the foreign affiliate, and
- relevant supporting documentation:
- describing the business(es) of the foreign affiliate,
- related to the nature of the income earned by the foreign affiliate,
- related to transactions involving the foreign affiliate, and
- related to dividends paid or received by the foreign affiliate.