A non-resident discretionary trust (“NRT”) owned all the shares of CFA. Amounts in respect of CFA’s foreign accrual property income had to be included in NRT’s 2002, 2004 and 2006 taxable income by virtue of “old” s. 94(1)(c)(i)(C) (“FAPI-Inclusions”).
In its 2007 taxation year, which was its final taxation year, NRT became subject to “new” s. 94, and included a dividend received from CFA in its income. Would a s. 91(5) deduction be available to NRT for such dividend, so as to take into account the FAPI-Inclusions? CRA responded:
[T]he FAPI-Inclusions trigger permanent adjustments to the ACB of the shares of CFA [under s. 92(1) and s. 53(1)(d)], which adjustments have to be considered in order to determine any further Canadian tax consequences to NRT in respect of its shares of CFA.
…[T]he dividend received by NRT from CFA during its final taxation year, while NRT is subject to “new” subsection 94(3), is prescribed to have been paid out of CFA’s taxable surplus by virtue of [Reg.] 5900(3) of the Income Tax Regulations. Thus, considering that subsection 91(5) relies on the prior application of section 92 in respect of the shares of CFA,… NRT would generally be entitled to a deduction under subsection 91(5) in computing its income for that year… .[Furthermore] the general purpose of subsection 91(5)… is to ensure that… foreign accrual property income [is] not taxed a second time upon distribution of the related income.