An indirectly-owned foreign affiliate ("FA1") generates substantial exempt surplus during a taxation year and uses the resulting cash flow to make upstream loans to (Canadian) "Parent." Neither FA1 nor any other intervening FA has a surplus account balance at its last taxation year end. Does the 90-day rule in Reg. 5901(2)(a) apply in calculating exempt surplus for purposes of s. 90(9)(a)(i)(A)? CRA stated:
The exempt earnings of a foreign affiliate of a corporation are computed on an annual basis and are added to the affiliate's exempt surplus in respect of the corporation only at the conclusion of each of the affiliate's respective taxation years. As a result, we would not consider exempt earnings of a foreign affiliate in respect of a corporation arising in the taxation year of the affiliate in which a particular loan is made to…the corporation, to form part of the exempt surplus, at the lending time, of the foreign affiliate… .
[W]ere paragraph 5901(2)(a) applicable to a real series of dividends paid up the chain of affiliates at that time such that a deduction would be available to Parent under paragraph 113(1)(a) in respect of the real dividend received by it, we would not consider that deduction to be in respect of the exempt surplus of any foreign affiliate of Parent at the lending time.