2013-0488881E5 Upstream Loan

Principal Issues: The application of the upstream loan rules in subsections 90(6) to 90(15) in the following scenarios. Scenario1: For the purposes of determining the deduction under subsection 90(9), will the "90-day" rule in paragraph 5901(2)(a) of the Regulations apply to the notional dividend contemplated in paragraph 90(9)(a)? Scenario 2: For the purposes of determining the deduction under subsection 90(9), can the taxpayer be considered to have taken all the necessary steps to have made the "disproportionate election" under paragraph (b) of the definition of “underlying foreign tax applicable” in subsection 5907(1) of the Regulations? Scenario 3: For the purposes of determining the deduction under subsection 90(9), can the taxpayer be considered to have taken all the necessary steps to have made the election in paragraph 5901(2)(b) of the Regulations that deems a dividend to be paid from pre-acquisition surplus? Scenario 4: For the purposes of determining the deduction under subsection 90(9), can the taxpayer be considered to have taken all the necessary steps to have made the election in subsection 5901(1.1) of the Regulations that deems a dividend to be paid from taxable surplus before hybrid surplus? Scenario 5: Are gains which are deemed to arise by virtue of the application of subsection 40(3) as a result of notional dividends between lower tier foreign affiliates relevant for the purposes of determining the deduction under subsection 90(9)? Scenario 6: Is there relief from a multiple income inclusion arising as a result of the transfer of a loan within a foreign affiliate group on the liquidation of the creditor foreign affiliate? Scenario 7: Where there is a series of loans and other transactions and repayments, would 90(6) apply to each loan in the series notwithstanding that there is no deduction under 90(14) in respect of the repayments in the series?

Position: Scenario 1: No. Scenario 2: Yes. Scenario 3: Yes. Scenario 4: Yes. Scenario 5: No. Scenario 6: Yes. Scenario 7: No.

Reasons: Scenario 1: Clause 90(9)(a)(i)(A) refers to the “exempt surplus – at the lending time in respect of the corporation – of a foreign affiliate of the corporation”. The Technical Notes to subsection 90(9) also specify that the earnings of the foreign affiliate after the date of the Loan are not to be considered for the purposes of determining the deduction under subsection 90(9). See also 2014-0526721C6. Scenario 2: Canco could be considered, hypothetically, to have taken all the necessary steps to make the disproportionate election. This view is consistent with the Technical Notes. Scenario 3: Since Canco would have been in a position elect under paragraph 5901(2)(b) of the Regulations, it is our view that for the purposes of subsection 90(9) an amount may “reasonably be considered to have been deductible in respect of the dividend under paragraph 113(1)(d). Scenario 4: Since Canco would have been in a position to make an election under subsection 5901(1.1) of the Regulations, it is our view that for the purposes of subsection 90(9) an amount may “reasonably be considered to have been deductible” in respect of the dividend under paragraph 113(1)(b). Scenario 5: The provisions of subsection 90(9) contemplate only the actual ES, HS, HUT, TS, UFT and ACB amounts at the lending time. This view is consistent with the Technical Notes. As FA1 has no HUT there can be no amount determined under clause 90(9)(a)(i)(B). Scenario 6: Subsection 248(28). Scenario 7: Consistent with our position on subsection 15(2) as described in Interpretation Bulletin IT-119R4. See 9219115.

Author: Argento, Angelina
Section: 90(6) to 90(15)

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                                                                                                                                                      2013-048888
                                                                                                                                                      Angelina Argento

October 30, 2014

Dear XXXXXXXXXX:

Re:  Upstream Loan Rules in Subsections 90(6) to 90(15) of the Act

We are writing to you in response to your letter dated May 14, 2013 requesting an interpretation of subsections 90(6) to 90(15) of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (the "Act") in the context of the seven scenarios outlined in your letter. 

Unless otherwise stated, all references to a statute are references to the provisions of the Act, as amended to the date hereof and every reference herein to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

Scenario 1:  “90 day rule” – paragraph 5901(2)(a) of  the Regulations

You ask us to assume the following facts:
1.    Canco is a corporation resident in Canada for purposes of the Act;
2.    FA is a corporation which is not resident in Canada for purposes of the Act;
3.    Canco owns all of the shares of FA;
4.    At all relevant times, Canco’s adjusted cost base (“ACB”) in the shares of FA is nil;Canco and FA each have a December 31st taxation year end;
5.    On December 31, 2012, FA has a nil “net surplus” balance as that term is defined in subsection 5907(1) of the Regulations;
6.    On December 31, 2012, FA has no exempt deficit, hybrid deficit or taxable deficit, as those terms are defined in subsection 5907(1) of the Regulations;
7.    During its 2013 taxation year, FA earns $1500 of  “exempt earnings” as that term is defined in subsection 5907(1) of the Regulations;
8.    On June 30, 2013 FA makes a loan of $1500 to Canco (“Loan”);
9.    The Loan will not be repaid by June 30, 2015; and
10.   FA will not carry out any transactions aside from those described above that will affect its surplus balances during the relevant period.

Question

Based on the facts in Scenario 1, subsection 90(6) will apply to include $1500 in Canco’s income for its taxation year ending December 31, 2013.  You ask whether for the purpose of determining the amount deductible by Canco pursuant to subsection 90(9), the “90-day” rule described in paragraph 5901(2)(a) of the Regulations will apply to the notional dividend contemplated in paragraph 90(9)(a), so that, in Scenario 1, Canco can claim a deduction of $1500 in its taxation year ending December 31, 2013?

Our Comments

Under the general ordering of surplus distribution rules in subsection 5901(1) of the Regulations, an actual dividend paid by FA to Canco on June 30, 2013 would, in Scenario 1, have been deemed to have been paid out of FA’s pre-acquisition surplus.  Paragraph 5901(2)(a) of the Regulations provides that where a FA pays a dividend at any time in its taxation year that is more than 90 days after the commencement of that year, the portion of the dividend that would otherwise be deemed to have been paid out of FA’s pre-acquisition surplus is instead deemed to have been paid out of FA’s exempt surplus (“ES”), hybrid surplus (“HS”) and/or taxable surplus (“TS”) in respect of a Canadian resident corporation, to the extent that it would have been deemed to have been so paid if, immediately after the end of that year, that portion were paid as a separate dividend.  

Therefore, if instead of making the Loan, FA paid an actual dividend to Canco on June 30, 2013, paragraph 5901(2)(a) of the Regulations would have applied to deem the dividend to be paid out of FA’s current year (2013) ES, since the dividend would have been paid more than 90 days after the commencement of FA’s 2013 taxation year and a deduction would have been available to Canco pursuant to paragraph 113(1)(a).  

Although Canco would have been in a position to have paragraph 5901(2)(a) of the Regulations apply to deem an actual dividend to be paid out of FA’s current year exempt surplus, it is our view, as expressed at the 2014 IFA Conference, that it would be contrary to the words “exempt surplus – at the lending time  in respect of the corporation” in clause 90(9)(a)(i)(A) to consider the application of paragraph 5901(2)(a) of the Regulations in determining the amount deductible under subsection 90(9).  This interpretation is consistent with the Technical Notes to subsection 90(9) which state that the “deductible amount (under subsection 90(9)) is "locked in" at the time the loan is made”and “there is no ability to increase the subsection 90(9) amount based on future earnings of the foreign affiliate.” As a result, in this example, since at the time the Loan was made, FA’s ES in respect of Canco was nil, no amount would be computed under clause 90(9)(a)(i)(A). 

Scenario 2: Disproportionate Election – paragraph (b) of the definition of “underlying foreign tax applicable” – Subsection 5907(1) of the Regulations

You ask us to assume the same facts as set out in #1 to #5 and #9 to #11 of Scenario 1 and the following additional facts:
1.    On December 31, 2012, FA has a TS and “underlying foreign tax” (“UFT”) balances as those terms are defined in subsection 5907(1) of the Regulations of $3000 and $500, respectively; and
2.    On December 31, 2012, FA has a nil ES and HS balances.

Question

Based on the facts in Scenario 2, subsection 90(6) will apply to include $1500 in Canco’s income for its taxation year ending December 31, 2013.  You ask whether for the purposes of determining the amount deductible by Canco pursuant to subsection 90(9), Canco could be considered to have filed the claim (the “Disproportionate Election”) under paragraph (b) of the definition of “underlying foreign tax applicable” (“UFTA”) in subsection 5907(1) of the Regulations, so that in Scenario 2, Canco can claim a deduction of $1500 in its taxation year ending December 31, 2013?
Our Comments 

Pursuant to clause 90(9)(a)(i)(C) Canco is entitled to deduct the total of all amounts that may “reasonably be considered to have been deductible” under paragraph 113(1)(b), in respect of the taxable surplus of FA, at the lending time, in respect of Canco had FA declared and paid a dividend of $1500 to Canco instead of making the Loan.  Absent a Disproportionate Election, the notional dividend contemplated in paragraph 90(9)(a) would have been characterized as having been paid from FA’s TS, thereby allowing Canco to claim a deduction of $750 under paragraph 113(1)(b) (footnote 1).  However, it is our view that for the purposes of determining the amount deductible by Canco pursuant to subsection 90(9), Canco could be considered, hypothetically, to have taken all the necessary steps to make the Disproportionate Election, such that in Scenario 2, a $1500 deduction would be available to Canco under subsection 90(9) by virtue of clause 90(9)(a)(i)(C).  This view is consistent with the Technical Notes issued by the Department of Finance on the introduction of subsection 90(9). 

Scenario 3 : Pre-Acquisition Surplus Dividend Election – Paragraph 5901(2)(b) of the Regulations

You ask us to assume the following facts:
1.    Canco1 is a corporation resident in Canada for purposes of the Act;
2.    Canco2 is a corporation resident in Canada for purposes of the Act;
3.    At all relevant times, Canco1 and Canco2 are related within the meaning of subsection 251(2);
4.    FA is a corporation which is not resident in Canada for purposes of the Act;
5.    FA has one class of share capital;
6.    Canco1 and Canco2, respectively own 60% and 40% of the share capital of FA;
7.    Canco1, Canco2 and FA each have a December 31st taxation year end;
8.    Canco1 has an ACB in the shares of FA of $900;
9.    Canco2 has an ACB in the shares of FA of $600;
10.   On December 31, 2012, FA has HS and “net surplus” balances as those terms are defined in subsection 5907(1) of the Regulations of $1500 in respect of both Canco1 and Canco2;
11.   On December 31, 2012, FA has a nil “hybrid underlying tax” (“HUT”) balance as that term is defined in subsection 5907(1) of the Regulations in respect of both Canco1 and Canco2;
12.   On June 30, 2013, FA makes a loan of $1500 to Canco1 (“Loan”); and
13.   The Loan will not be repaid by June 30, 2015.

Questions

Based on the facts in Scenario 3, subsection 90(6) would apply to include $900 (footnote 2) and $600 (footnote 3) in the respective incomes of Canco1 and Canco2 for their taxation years ending on December 31, 2013.  Assuming that all the necessary conditions are otherwise met, for the purpose of determining the amount deductible by Canco1 and Canco2 pursuant to subsection 90(9), you ask us the following questions:
*     can Canco1 and Canco2 be considered to have taken all the necessary steps to have made the election under paragraph 5901(2)(b) of the Regulations to have the notional dividend contemplated in paragraph 90(9)(a) deemed to be paid from FA’s pre-acquisition surplus, so that, in Scenario 3, Canco1 and Canco2 can claim a deduction of $900 and $600, respectively, in their taxation year ending December 31, 2013; and
*     whether all the related Canadian resident corporate taxpayers in respect of which the notional dividend paying corporation is an FA will be assumed to have taken the necessary steps to make the election under paragraph 5901(2)(b) of the Regulations? 

Our Comments

Under the general ordering of surplus distribution rules in subsection 5901(1) of the Regulations, the notional dividend contemplated in paragraph 90(9)(a) would, in Scenario 3, be out of FA’s HS.  However, no amount would be computed under clause 90(9)(a)(i)(B) because FA’s HS balance exceeds the amount determined by the formula referred to in that clause.  Moreover, there would be no amount computed under clause 90(9)(a)(i)(D) because no portion of the notional dividend would be out of FA’s pre-acquisition surplus.

Paragraph 5901(2)(b) of the Regulations provides that where a whole dividend is paid by a FA at any particular time in its taxation year and a valid election is made, the portion of the whole dividend that would otherwise be deemed by subsection 5901(1) of the Regulations to have been, in whole or part, paid out of the ES, HS or TS of the FA, in respect of a Canadian resident corporation, is instead deemed to have been paid out of the pre-acquisition surplus of the FA in respect of the Canadian resident corporation.  Pre-acquisition surplus dividends are deductible from taxable income (footnote 4) and reduce the Canadian corporation’s ACB in the shares of FA (footnote 5).

Pursuant to clause 90(9)(a)(i)(D) the deduction that would be available to Canco1 and Canco2 under paragraph 113(1)(d) if a notional dividend were paid by FA out of pre-acquisition surplus is an element in computing the deduction in subsection 90(9) to Canco1 and Canco2, to the extent, at the time the Loan was made, of their respective ACB in the shares of FA.

Since at the time the Loan was made, Canco1 and Canco2 have an ACB of $900 and $600, respectively, in the shares of FA, and Canco1 and Canco2 would each have been in a position to jointly make an election under paragraph 5901(2)(b) of the Regulations to deem an actual dividend paid by FA to be out of FA’s pre-acquisition surplus, it is our view, as expressed at the 2013 IFA Conference (footnote 6), that for the purposes of subsection 90(9) Canco 1 and Canco 2 would be in position to demonstrate that $900 and $600 may “reasonably be considered to have been deductible” by them, respectively, provided that each company claims the full amount of the available deduction.  

Scenario 4: Election to deem TS dividend ahead of HS dividend – 5901(1.1) Regulations

You ask us to assume the same facts as set out in #1 to #5 and #9 to #11 of Scenario 1 and the following facts:
1.    On December 31, 2012, FA has a nil ES balance;
2.    On December 31, 2012 FA has a HS and HUT balances of $1500, and nil, respectively; and
3.    On December 31, 2012, FA has a TS and UFT balances of $1500 and $500, respectively.

Question

Based on the facts in Scenario 4, subsection 90(6) would apply to include $1500 in Canco’s income for its taxation year ending on December 31, 2013.  Assuming that all necessary conditions are otherwise met, for the purpose of determining the amount deductible by Canco pursuant to subsection 90(9), you ask whether Canco can be considered to have taken all the necessary steps to have made the election under subsection 5901(1.1) of the Regulations to have the notional dividend contemplated in paragraph 90(9)(a) deemed to be paid from FA’s TS, so that, in Scenario 4, Canco can claim a deduction of $1500 in its taxation year ending December 31, 2013?

Our Comments

Under the general ordering of surplus distribution rules of subsection 5901(1) of the Regulations, HS is deemed to be distributed after ES but before TS.  Therefore, the notional dividend contemplated in paragraph 90(9)(a) would, in Scenario 4, be out of FA’s HS.  However, no amount would be computed under clause 90(9)(a)(i)(B) because, at the time the Loan was made, FA’s HS balance exceeds the amount determined by the formula referred to in that clause.  Pursuant to subsection 5901(1.1) of the Regulations, a taxpayer may elect, in respect of a particular whole dividend, to treat a dividend as having been paid out of TS after ES, but before HS.

Since Canco would have been in a position to make an election under subsection 5901(1.1) of the Regulations to deem the full amount of an actual $1500 dividend paid by FA to be paid out of FA’s TS, it is our view that for the purposes of subsection 90(9) an amount may “reasonably be considered to have been deductible” in respect of the dividend under paragraph 113(1)(b).  As a result, in Scenario 4, Canco would be in a position to deduct $1500 from its income pursuant to clause 90(9)(a)(i)(C).

Scenario 5: Subsection 90(9) and deemed 40(3) gains

You ask us to assume the following facts:
1.    Canco is a corporation resident in Canada for purposes of the Act;
2.    FA1 is a corporation which is not resident in Canada for purposes of the Act;
3.    Canco owns all of the share capital of FA1;
4.    Canco’s ACB in the shares of FA1 is nil;
5.    FA2 is a corporation which is not resident in Canada for purposes of the Act;
6.    FA1 owns all of the share capital of FA2;
7.    The shares of FA2 are “excluded property” as defined in subsection 95(1);
8.    FA1’s ACB of the shares of FA2 is nil;
9.    Canco, FA1 and FA2 each have a December 31st taxation year end;
10.   On December 31, 2012 FA1 has ES and HS balances, as those terms are defined in subsection 5907(1) of the Regulations, of $750 and $750, respectively;
11.   On December 31, 2012 FA1 has nil HUT and TS balances as those terms are defined in subsection 5907(1) of the Regulations;
12.   On December 31, 2012, FA2 has a nil “net surplus” balance as that term is defined in subsection 5907(1) of the Regulations;
13.   On June 30, 2013, FA2 makes a loan of $1500 to Canco (“Loan”);
14.   The Loan will not be repaid by June 30, 2015; and
15.   FA1 and FA2 will not carry out any transactions aside from those described above that could affect their surplus balances during the relevant period.

Question

Based on the facts in Scenario 5, subsection 90(6) would apply to include $1500 in Canco’s income for its taxation year ending December 31, 2013 in respect of the Loan.  By virtue of paragraph 90(9)(a), the particular amount deductible under subsection 90(9) is the amount that Canco demonstrates would have been deductible, under the provisions of subsection 113(1) if the specified amount in respect of the Loan had instead been paid to Canco as part of one or more dividends.  Therefore, to determine the amount deductible by Canco under subsection 90(9), the tax consequences of a notional dividend from FA2 to FA1 must first be considered and then a notional dividend from FA1 to Canco must be considered. 

You note that under the general ordering of surplus distribution rules in subsection 5901(1) of the Regulations, an actual dividend by FA2 to FA1 on June 30, 2013, would, in Scenario 5, have been deemed (footnote 7) to be out of FA2’s pre-acquisition surplus.  Pursuant to paragraph 92(2)(c) and clause 53(2)(b)(i)(A), FA1 would be required to reduce the ACB of its shares in FA2 by the amount of the pre-acquisition surplus dividend (in this case, $1500).  Since FA1’s ACB in the shares of FA2 is nil, pursuant to paragraph 40(3)(c), $1500 is deemed to be a gain realized by FA1 from the disposition of the shares of FA2 (“Gain”). 

You ask whether a gain which is deemed to arise by virtue of the application of subsection 40(3) as a result of a notional dividend between lower tier FAs is relevant for the purposes of determining the deduction under subsection 90(9)?  In particular, in determining the amount that is deductible by Canco pursuant to subsection 90(9) in Scenario 5, you ask whether or not the implications of the Gain on the surplus pools of FA1 are to be ignored?

Our Comments

We are of the view that the provisions of subsection 90(9) contemplate only the actual ES, HS, HUT, TS, UFT and ACB amounts at the lending time being relevant in the determination of the deduction thereunder.   Therefore, it is our view that the deemed gain to FA1 that would arise by virtue of the application of subsection 40(3) if, as contemplated by paragraph 90(9)(a), FA2 were to pay a $1500 dividend to FA1 (and FA1 were to pay a $1500 dividend to Canco) would not be included when computing the HS balance of FA1 and the deduction available to Canco under subsection 90(9) in the above scenario.

Consequently, in Scenario 5, $750 is the particular amount deductible by Canco in its taxation year ending December 31, 2013 pursuant to clause 90(9)(a)(i)(A).

Scenario 6: Transfer of Loan within FA group as result of Liquidation of creditor FA

You ask us to assume the following facts:
1.    Canco is a corporation resident in Canada for purposes of the Act;
2.    FA1 is a corporation which is not resident in Canada for purposes of the Act;
3.    Canco owns all of the share capital of FA1;
4.    FA2 is a corporation which is not resident in Canada for purposes of the Act;
5.    FA1 owns all of the share capital of FA2;
6.    Canco, FA1 and FA2 each have a December 31st taxation year end;
7.    On December 31, 2012, FA1 has a nil “net surplus” balance as that term is defined in subsection 5907(1) of the Regulations;
8.    FA1 has nil “net earnings” as that term is defined in subsection 5907(1) of the Regulations, for its fiscal year ending December 31, 2013;
9.    On December 31, 2012, FA2 has an ES balance and a “net surplus” balance, as those terms are defined in subsection 5907(1) of the Regulations, of $1500;
10.   FA2 has nil “net earnings”, as that term is defined in subsection 5907(1) of the Regulations, for its fiscal year ending December 31, 2013;
11.   On June 20, 2013, FA2 makes a loan of $1500 to Canco (“FA2 Loan”);
12.   The FA2 Loan will have a term of 10 years and no portion thereof will be repaid before the end of the term;
13.   On February 20, 2014, FA2 liquidates into FA1; and
14.   Aside from the application of subsection 5905(7) of the Regulations, the liquidation results in no change to the surplus accounts of FA1 and FA2.

Question

You note that as a result of the liquidation of FA2, although Canco has not received a loan from FA1, Canco becomes indebted to FA1 (“FA1 Loan”).  The FA1 Loan will not be repaid by February 20, 2016.  Furthermore, in Canco’s taxation year ending on December 31, 2013, assume that Canco deducted, pursuant to subsection 90(9), $1500 from its income to offset the 90(6) income inclusion in respect of the FA2 Loan. As such, for its taxation year ending on December 31, 2014, Canco would be required to include, pursuant to subsection 90(12), $1500 in its income in respect of the FA2 Loan and to include, pursuant to subsection 90(6), $1500 in its income in respect of the FA1 Loan.

You ask whether any relief is available to Canco in respect of the multiple income inclusions resulting from what is effectively one outstanding loan amount in these circumstances.

Our Comments

It is our view that, by virtue of paragraph 248(28)(a), either the amount determined under subsection 90(6) in respect of the FA1 Loan or the amount determined under subsection 90(12) in respect of the FA2 Loan, not both, is required to be included in the income of Canco for its taxation year ending on December 31, 2014. 

Scenario 7: Temporary Repayment – “series”

You ask us to assume the following facts:
1.    Canco is a corporation resident in Canada for purposes of the Act;
2.    FA is a corporation which is not resident in Canada for purposes of the Act;
3.    Canco owns all of the share capital of FA;
4.    Canco’s ACB in the shares of FA is nil;
5.    Canco and FA each have a December 31st taxation year end;
6.    On December 31, 2012 FA has a nil “net surplus” balance as that term is defined in subsection 5907(1) of the Regulations;
7.    During its 2013 taxation year, FA has no net “earnings” as that term is defined in subsection 5907(1) of the Regulations;
8.    On June 20, 2013 FA makes a loan of $1500 to Canco with a term of one year (“Loan”); and
9.    On February 6, 2014 Canco repays the Loan and FA uses the cash to advance a new loan (“New Loan”) to Canco on similar terms as the Loan.

Question

Based on the facts in Scenario 7, subsection 90(6) would apply to include $1500 in Canco’s income for its taxation year ending December 31, 2013 in respect of the Loan.  Canco would not be able to claim a deduction under subsection 90(9).  It would also not be able to claim a deduction under subsection 90(14) on the repayment of the Loan in 2014 because the repayment would be considered to be part of a series of loans or other transactions and repayments.

You ask whether subsection 90(6) would apply to include $1500 in Canco’s income in its taxation year ending December 31, 2014 in respect of the New Loan?

Our Comments

It is our view that where subsection 90(6) has applied to a loan or indebtedness that is a part of a series of loans or other transactions and repayments, it will not apply again to the same amount of another loan or indebtedness in that series.  Therefore, in Scenario 7 subsection 90(6) would not apply to include the amount of the New Loan in Canco’s income.  This result is consistent with the object and spirit of subsection 90(6) and the CRA’s administrative practice with respect to the operation of subsection 15(2) as reflected in Interpretation Bulletin IT-119R4.

We trust that the above is of assistance to you.

Yours truly,

Olli Laurikainen CPA, CA
International Section II
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Paragraph 113(1)(b) provides Canco with a deduction in computing its taxable income in respect of dividends paid out of FA’s TS, but only to the extent of any UFTA (as that term is defined in subsection 5907(1) of the Regulations) to such dividends, grossed up by the “relevant tax factor” (“RTF”) (as that term is defined in subsection 95(1)) minus 1.  The UFT applicable to a dividend is generally the pro-rata share of the UFT in relation to the TS of the FA.  A corporation's RTF for a taxation year is defined in subsection 95(1) to be one divided by the applicable corporate rate established by paragraph 123(1)(a) (38%) less the general rate reduction percentage for the year as defined in section 123.4, which is 13% for 2012 and following years. The RTF is therefore 1/(0.38-0.13) = 1/(0.25) = 4.  Therefore, Canco’s deduction under paragraph 113(1)(b) is the lesser of:
-     $250 x (4-1) = $750, and
-     $1500.
2  Since Canco1 has a surplus entitlement percentage (“SEP”) as that term is defined in subsection 5905(13) of the Regulations, of 60% in FA, the “specified amount” (as that term is defined in subsection 90(15)) which must be included in Canco1’s income is $900 (i.e., $1500 x 60%).
3  Since Canco2 has an SEP of 40% in FA, the “specified amount” included in Canco2’s income is $600.
4  Pursuant to paragraph 113(1)(d).
5  Pursuant to paragraph 92(2)(c) and clause 53(2)(b)(i)(A).
6  CRA Document No. 2013-0483791C6.
7  By paragraph 5901(1)(c) of the Regulations.

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