2021-0882371I7 Dividend payment and 94.1(1)(g)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a dividend paid by a controlled foreign affiliate is an amount described in paragraph 94.1(1)(g).

Position: No.

Reasons: The dividend is not an amount that is income from an offshore investment fund property.

Author: Graham, Kanwal
Section: 94.1(1); 91(1); 95(1) "foreign accrual property income".

Maria Guerrera                                          HEADQUARTERS
Team Leader                                             Income Tax Rulings Directorate
Audit division
XXXXXXXXXX                                          Kanwal Graham 


Dividend payment and paragraph 94.1(1)(g)

This is in reply to your request, as outlined in a meeting held on February 3, 2021, (footnote 1) for our views on the effect of a dividend distribution by a controlled foreign affiliate on a Canadian taxpayer’s income inclusion in the context of section 94.1 of the Income Tax Act (“Act”).

You are conducting an audit of XXXXXXXXXX (“Canco”), who received a dividend payment from its wholly-owned subsidiary and controlled foreign affiliate, XXXXXXXXXX (“CFA”). CFA owns 50% of the common shares of XXXXXXXXXX (“FA Shares”), which you have asked us to assume is an offshore investment fund property, as that term is described in subsection 94.1(1) of the Act (“OIFP”). CFA has received dividend distributions over the years from the OIFP, and in one particular year, paid a dividend to Canco. You have asked whether a dividend paid by CFA to Canco would give rise to a deduction pursuant to paragraph 94.1(1)(g) from the income inclusion computed pursuant to paragraph 94.1(1)(f).

All legislative references in this document are to the Act, unless otherwise stated.

Our comments

Section 94.1 is an anti-avoidance provision relating to investors in OIFP. Where the provision is found to apply, an amount is included in computing the taxpayer's income in respect of the investment. However, pursuant to paragraph 94.1(1)(g), that amount is reduced by distributions or other amounts in respect of the OIFP (other than capital gains) that are required by any other provision of the Act to be included in the taxpayer's income for the relevant year, in order to prevent double taxation.

Pursuant to paragraph 94.1(1)(a), an OIFP does not include shares of the capital stock of a controlled foreign affiliate. As such, the income inclusion computed under paragraphs 94.1(1)(f) and (g) would not apply to Canco. Instead, Canco could indirectly be subject to the application of 94.1(1) through the potential application of that provision to CFA resulting from the definition of foreign accrual property income (“FAPI”) in subsection 95(1), specifically element C of that definition, which reads as follows:

“C is, where the affiliate is a controlled foreign affiliate of the taxpayer, the amount that would be required to be included in computing its income for the year if

(a) subsection 94.1(1) were applicable in computing that income,

(b) the words “earned directly by the taxpayer” in that subsection were replaced by the words “earned by the person resident in Canada in respect of whom the taxpayer is a foreign affiliate”,

(c) the words “other than a controlled foreign affiliate of the taxpayer or a prescribed non-resident entity” in paragraph 94.1(1)(a) were replaced by the words “other than a prescribed non-resident entity or a controlled foreign affiliate of a person resident in Canada of whom the taxpayer is a controlled foreign affiliate”, and

(d) the words “other than a capital gain” in paragraph 94.1(1)(g) were replaced by the words “other than any income that would not be included in the taxpayer's foreign accrual property income for the year if the value of C in the definition “foreign accrual property income” in subsection 95(1) were nil and other than a capital gain”

By including in income pursuant to subsection 91(1) its share of CFA’s FAPI (which includes under element C the amount determined by subsection 94.1(1) in CFA’s FAPI computation), Canco will effectively include an imputed amount in respect of the FA Shares in its income, to the extent of its interest in the CFA. Where subsection 94.1(1) is otherwise applicable, element C captures in CFA’s FAPI an amount determined under subsection 94.1(1) read as adapted by element C of the definition of FAPI in subsection 95(1) to integrate both provisions. Modified subsection 94.1(1) reads as follows (the modifications are in square brackets):

94.1 (1) If in a taxation year a taxpayer holds or has an interest in property (referred to in this section as an "offshore investment fund property")

(a) that is a share of the capital stock of, an interest in, or a debt of, a non-resident entity (other than a controlled foreign affiliate of the taxpayer or a prescribed* non-resident entity) or an interest in or a right or option to acquire such a share, interest or debt, and

(b) that may reasonably be considered to derive its value, directly or indirectly, primarily from portfolio investments of that or any other non-resident entity in


and it may reasonably be concluded, having regard to all the circumstances, including


(d) the extent to which any income, profits and gains that may reasonably be considered to be earned or accrued, whether directly or indirectly, for the benefit of any non-resident entity are subject to an income or profits tax that is significantly less than the income tax that would be applicable to such income, profits and gains if they were [earned by the person resident in Canada in respect of whom the taxpayer is a foreign affiliate], and

(e) the extent to which the income, profits and gains of any non-resident entity for any fiscal period are distributed in that or the immediately following fiscal period,

that one of the main reasons for the taxpayer acquiring, holding or having the interest in such property was to derive a benefit from portfolio investments in assets described in any of subparagraphs (b)(i) to (ix) in such a manner that the taxes, if any, on the income, profits and gains from such assets for any particular year are significantly less than the tax that would have been applicable under this Part if the income, profits and gains had been [earned by the person resident in Canada in respect of whom the taxpayer is a foreign affiliate], there shall be included in computing the taxpayer's income for the year the amount, if any, by which

(f) the total of all amounts each of which is the product obtained when

(i) the designated cost to the taxpayer of the offshore investment fund property at the end of a month in the year

is multiplied by

(ii) 1/12 of the total of

(A) the prescribed rate of interest for the period that includes that month, and

(B) two per cent


(g) the taxpayer's income for the year [(other than any income that would not be included in the taxpayer’s foreign accrual property income for the year if the value of C in the definition “foreign accrual property income” in subsection 95(1) were nil and other than a capital gain)] from the offshore investment fund property determined without reference to this subsection.

Had Canco owned the FA Shares directly, the dividend received on the FA Shares would have been included in income by Canco under section 90. The fact that Canco does not hold the shares directly brings in the FAPI and OIFP regimes. Subsection 94.1(1) is not directly applicable to Canco on the basis that it does not hold OIFP. CFA received dividends from the FA Shares. Those dividends would not have been included in the computation of CFA’s FAPI as dividends from another foreign affiliate of Canco are excluded from the computation of the FAPI of CFA pursuant to paragraph (b) of element A of the definition of FAPI in subsection 95(1). The inclusion in CFA’s FAPI resulting from the reading of paragraph 94.1(1)(g) as modified by element C in the definition of foreign accrual property income in subsection 95(1) effectively results in an inclusion in Canco’s income that is comparable to the inclusion that would have resulted from the direct holding of the FA Shares. More specifically, the denial of the reduction described in paragraph 94.1(1)(g) resulting from the modified parenthetic exclusion in that provision achieves the result described above.

The payment of a dividend by CFA to Canco is not relevant to the application of modified subsection 94.1(1). The CFA dividend is not income from OIFP because of the parenthetical exclusion in paragraph 94.1(1)(a).

We note that subsection 91(5) might be relevant where Canco includes an amount under subsection 91(1), whether that inclusion results from the application of modified 94.1(1) or not.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Charles Taylor
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch


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

1 Virtual meeting between Compliance Programs Branch (Maria Guerrera, Simon Binette) and Income Tax Rulings Directorate (Nicolas Bilodeau, and Kanwal Graham).

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