Subsection 5901(1)
Administrative Policy
27 September 1991 T.I. (Tax Window, No. 11, p. 13, ¶1513)
Unless some part of the international shipping business of the foreign affiliate is actually carried on in the country in which the foreign affiliate is resident, its business will not be considered to be carried on through a permanent establishment in that country; and the mere maintenance of registered office will not by itself constitute a permanent establishment in respect of its international shipping business.
2 July 1991 T.I. (Tax Window, No. 5, p. 15, ¶1326)
Where a non-resident subsidiary of a Canadian corporation which owns or charters vessels to engage in international traffic and maintains a permanent establishment in Canada rather than abroad, it will earn exempt income which is not attributed to any country and therefore will be included in its pre-acquisition surplus.
Subsection 5901(1.1)
Administrative Policy
30 October 2014 T.I. 2013-0488881E5 - Upstream Loan
///?page_id=873#2013-0488881E5">s. 90(9).
Subsection 5901(2)
Paragraph 5901(2)(a)
Administrative Policy
30 October 2014 T.I. 2013-0488881E5 - Upstream Loan
///?page_id=873#2013-0488881E5">s. 90(9).
1 April 2011 T.I. 2008-0297541E5
FA2, which had no exempt or taxable surplus at the beginning of 2008 but will have exempt surplus of $100 at the end of 2008, is wholly owned by FA1, which had taxable surplus of $100 at the beginning of June 1, 2008. FA2 pays a $100 dividend (the "FA2 dividend") to FA2 on June 1, 2008, and FA1 then immediately pays a $100 dividend (the "FA1 dividend") to its Canadian parent ("Canco").
The FA2 dividend is deemed by Reg. 5902(2) to be paid out of exempt surplus of FA2. Accordingly, the FA1 dividend also would be considered to be paid out of exempt surplus of FA1. (All surplus amounts referred to above are in respect of Canco.)
15 January 1992 T.I. 9115295
FA1's only source of income in 1991 is the FA2 and FA3 dividends, described below, received from its wholly-owned subsidiaries, FA2 and FA3, and on June 30 FA1 has no exempt or taxable surplus (or deficit). On July 1, 1991, at a time that it has no exempt or taxable surplus (or deficit), FA2 pays the FA2 dividend of $100 to FA1. On August 1, 1991, FA1 pays a $100 dividend (the "FA1 dividend") to its wholly-owning Canadian parent ("Canco"). On September 1, 1991, at a time that it has no exempt or taxable surplus (or deficit), FA3 pays the FA3 dividend of $100 to FA1. The relevant earnings etc. for 1991 are that FA2 has taxable earnings of $100 and FA3 has exempt earnings of $100.
Reg. 5901(2) deems the FA2 dividend to have been paid out of taxable surplus of FA2 and the FA3 dividend to have been paid out of exempt surplus of FA3 of $100. As a result, FA1 has $100 of both taxable and exempt surplus out of which dividends can be paid immediately after the end of its 1991 taxation year (the time at which the FA1 dividend is deemed to be paid for purposes of Reg. 5901(2)). Accordingly, by order of the surplus distribution rules set out in Reg. 5901(1), the FA1 dividend is paid entirely out of exempt surplus. (All surplus amounts referred to above are in respect of Canco.)
Paragraph 5901(2)(b)
Administrative Policy
21 April 2015 Memorandum 2014-0560811I7 - FACL carryback Surplus & PAS election
In 2010, CFA paid the "2010 Dividend" to its 100% parent ("Canco"). On audit, CRA identified that CFA had realized a capital gain (giving rise to foreign accrual property income). Canco did not make an election under s. 79(2) of Bill C-48 or under Reg. 5901(2)(b). Is Canco barred from making a "PAS election" under Reg. 5901(2)(b) respecting the 2010 dividend (and, if yes, is administrative relief available)?
After a detailed review of the relevant transitional provisions and of the late-filing rules in Regs. 5901(2.1) and (2.2), CRA concluded that no PAS election had been made on a timely basis, and then stated:
…[C]onsidering…that subsection 220(3.2) of the Act and section 600 of the Regulations provide no discretion to the Minister to extend the time for making an election under paragraph 5901(2)(b)… there is no other statutory or administrative discretion available to the CRA to allow the taxpayer to late-file any required election in the present case in order for the 2010-Dividend to be treated as being paid out of PAS.
30 October 2014 T.I. 2013-0488881E5 - Upstream Loan
///?page_id=873#2013-0488881E5">s. 90(9).
Articles
Geoffrey S. Turner, "June 2014 Election Deadlines for Retroactive Application of New Foreign Affiliate Reorganization Rules", CCH International Tax, No. 74, February 2014, p. 1.
Retroactive election (p. 3)
… Bill C-48 permits taxpayers to electively apply Regulation 5901(2)(b) (together as a package with subsections 90(2) and 93(1.11)) retroactively to foreign affiliate distributions made after December 20, 2002.
Choice between surplus and basis grind (p. 3)
By electing to apply Regulation 5901(2)(b) retroactively, and by thereby electing to apply subsection 90(2) retroactively to deem each post-December 20, 2002 foreign affiliate distribution to be a dividend (regardless whether it was in fact paid as a dividend or a capital distribution), taxpayers can either (i) choose to treat the particular distribution as a dividend that accessed the relevant surplus balances of the distributing foreign affiliate (by not further electing to apply Regulation 5901(2)(b) to that particular dividend or deemed dividend), or (ii) choose to treat the particular distribution as a pre-acquisition surplus dividend that accessed the basis of the foreign affiliate before potentially dipping into the relevant surplus balances of the distributing foreign affiliate (by further electing to apply Regulation 5901(2)(b) to that particular dividend or deemed dividend).
E.g., resolving divided/capital character or surplus balances or using subsequently-ground exempt surplus (p. 3),
For example, consider an historic foreign affiliate distribution, paid for foreign corporate law purposes out of share premium, contributed surplus, or similar equity-type account where the Canadian tax treatment (as a dividend or capital distribution) might have been unclear. Or consider an historic dividend where the surplus balances might have been uncertain and there was a risk of elevating taxable surplus with insufficient underlying tax. Alternatively, consider an historic capital distribution paid by a foreign affiliate with exempt surplus that might have subsequently been eroded by exempt losses. In each of these cases, the Canadian parent now has the time-limited opportunity to reconsider the originally intended surplus and basis consequences of the distribution….
Geoffrey S. Turner, "New Foreign Affiliate Capital Distribution Elections: QROCs and Reg. 5901(2)(b) Dividends", CCH International Tax, No. 67, p. 1
From a group structure perspective, taxpayers may also wish to capitalize on the enhanced superiority of basis over surplus, by reorganizing their foreign affiliate groups to consolidate basis in one or more holding company foreign affiliates....The effect is to aggregate and consolidate the basis in those transferred top-tier foreign affiliate shares, into the basis of the newly issued top-tier foreign affiliate holding company shares held directly by the Canadian parent corporation. Future distributions sourced from the various underlying chains could then ultimately be paid to the Canadian parent by the top-tier foreign affiliate "basis consolidator" as dividends electively deemed by Regulation 5901(2)(b) to be pre-acquisition surplus dividends. In this manner, the potential adverse consequences from elevating possible "bad" hybrid surplus or taxable surplus from the underlying foreign affiliates could be deferred to the greatest extent. Moreover, by strategically electing under Regulation 5901(2)(b) in respect of those lower-tier foreign affiliate distributions, it may be possible to defer the elevation of any such "bad" hybrid surplus or taxable surplus up the chain.
Geoffrey S. Turner, "Upending the Surplus Ordering Rules: Implications of the New Regulation 5901(2)(b) Election", CCH Tax Topics, No. 2079, p. 1, 12 January 2012
Taxpayers may now hold their foreign affiliate groups under a "basis and surplus mixer" foreign affiliate holding company, and routinely use the Reg. 5901(2)(b) election for top-tier foreign affiliate distributions.
Elaine Buzzell, "Distributions of Share Premium by Foreign Affiliates", Corporate Finance, Vol. XVII, No. 2, 2011, p. 1962
Includes comparison with previous comfort letter proposals.