Canco1 owns 100% of the Class A shares, and a limited partnership (LP) with partners (including Canco 2) at arm’s length with Canco1 owns 100% of the Class B shares, of a foreign affiliate respecting Canco1 and 2. FA pays a dividend to Canco1 on the Class A shares.
Could Canco1 elect under Reg. 5901(2)(b)(i) respecting the above (Class A) dividend given the Reg. 5901(2)(b)(ii)(A) requirement that no member of LP (i.e., Canco 2) be a corporation that is otherwise eligible to elect under Reg. 5901(2)(b)(i)?
After noting that the Finance Technical Notes indicated that this “election is meant to allow the shareholders of a foreign affiliate to access their capital first as measured by the adjusted cost base … of the shares,” CRA stated:
Even though the preamble of paragraph 5901(2)(b) … does not specify to whom the “whole dividend” … is paid … based on a contextual and purposive analysis … the “whole dividend” … is a reference to a dividend that would cause a consequential ACB adjustment to the shares of the foreign affiliate on which it is paid, if a Regulation 5901(2)(b) election could be made in respect of that dividend.
This state of affairs did not apply here because, even if “Canco2 was entitled to make a Regulation 5901(2)(b) election in respect of the Class A dividend, there would be no consequential ACB adjustments with respect to Canco2 or LP since neither Canco2 nor LP owns any Class A shares.” Accordingly, the election was available to Canco1.
CRA went on to note that the Reg. 5901(2)(b)(ii)(A) tainting of a dividend by FA to Canco1(and Canco 2) would apply if FA had only one class of shares and a dividend was paid on a pro rata basis to both Canco1 and LP.