No relief where PPOP is the hybrid (p. 1281)
Subsection 91(4.5) does not provide relief, however, where the PPOP itself is the hybrid entity. For example, consider the situation where a taxpayer has the following structure:
- Pubco, a Canadian corporation, owns all issued and outstanding shares of U.S. Holdco, a U.S. C corporation.
- U.S. Holdco owns all issued and outstanding units of U.S. LLC.
- U.S. Holdco earns FAPI in respect of which it incurs U.S. tax.
In this example, the U.S. LLC is disregarded under U.S. law and therefore, U.S. Holdco does not own the shares of U.S. LLC that it owns for purposes of Canadian law. Accordingly, and stepping through the language of the provision, subsection 91(4.1) will deny Pubco its FAT deduction since U.S. Holdco, a "specified owner" in respect of the "taxpayer" Pubco, is considered under U.S. law to own less than all of the shares of U.S. LLC, a "pertinent person" in respect of the "affiliate" U.S. Holdco, that it is considered to own for purposes of the Act….
Application of s. 93(2.01) stop-loss rule to DLAD capital loss (p. 1282)
Regulation 5907(5) requires that capital gains and losses for surplus purposes are to be calculated in accordance with the rules in subsection 95(2) of the Act, which rules obviously include paragraph 95(2)(e). The reference to subsection 93(4) in the Regulation's definition of "hybrid surplus," however, makes clear that recourse should also be had to other relevant rules in the Act, including the stop loss rule in subsection 93(2). Subsection 93(2), in combination with newly introduced subsection 93(2.01), provides that any loss realized by a Canadian resident corporation or a foreign affiliate of the corporation on the disposition of a share of a foreign affiliate must be reduced by the total of any "exempt dividends" received or deemed to have been received on the share by the corporation or affiliate prior to the disposition. Accordingly, where a shareholder affiliate's capital loss on a DLAD is otherwise recognized for the purpose of calculating an affiliate's hybrid surplus, the loss is nevertheless reduced under subsections 93(2) and (2.01) by the amount of any exempt dividends previously paid on the shares of the disposing affiliate. An "exempt dividend" is defined in subsection 93(3) and generally refers to a dividend that is deductible from a Canadian-resident corporation's income under section 113 of the Act.
Example showing reduction of DLAD capital loss by exempt dividend (p. 1282)
Consider the following example:
- FA1 owns all the shares of FA2, which shares have an adjusted cost base of $100.
- FA2 has only one asset ("Asset"), which Asset has an adjusted cost base and fair market value of $100; the Asset is not an "excluded property" within the meaning assigned under subsection 95(1).
- FA2 has $100 of exempt surplus.
- FA2 distributes the Asset by way of an exempt dividend to FA1.
- FA2 is then liquidated on a DLAD.
Save for subclause 95(2)(e)(iv)(A)(II)1, FA1 would realize a capital loss on the disposition of FA2's shares equal to their cost basis of $100. This loss is recognized for hybrid surplus purposes, but is nevertheless deemed nil because of the $100 exempt dividend paid prior to the DLAD. Accordingly, no amount in respect of the loss is included in FA1's hybrid surplus calculation.
Application of s. 93(2.01) stop-loss rule to DLAD capital loss (p. 1282)
Regulation 5907(5) requires that capital gains and losses for surplus purposes are to be calculated in accordance with the rules in subsection 95(2) of the Act, which rules obviously include paragraph 95(2)(e). The reference to subsection 93(4) in the Regulation's definition of "hybrid surplus," however, makes clear that recourse should also be had to other relevant rules in the Act, including the stop loss rule in subsection 93(2). Subsection 93(2), in combination with newly introduced subsection 93(2.01), provides that any loss realized by a Canadian resident corporation or a foreign affiliate of the corporation on the disposition of a share of a foreign affiliate must be reduced by the total of any "exempt dividends" received or deemed to have been received on the share by the corporation or affiliate prior to the disposition. Accordingly, where a shareholder affiliate's capital loss on a DLAD is otherwise recognized for the purpose of calculating an affiliate's hybrid surplus, the loss is nevertheless reduced under subsections 93(2) and (2.01) by the amount of any exempt dividends previously paid on the shares of the disposing affiliate. An "exempt dividend" is defined in subsection 93(3) and generally refers to a dividend that is deductible from a Canadian-resident corporation's income under section 113 of the Act.
Example showing reduction of DLAD capital loss by exempt dividend (p. 1282)
Consider the following example:
- FA1 owns all the shares of FA2, which shares have an adjusted cost base of $100.
- FA2 has only one asset ("Asset"), which Asset has an adjusted cost base and fair market value of $100; the Asset is not an "excluded property" within the meaning assigned under subsection 95(1).
- FA2 has $100 of exempt surplus.
- FA2 distributes the Asset by way of an exempt dividend to FA1.
- FA2 is then liquidated on a DLAD.
Save for subclause 95(2)(e)(iv)(A)(II)1, FA1 would realize a capital loss on the disposition of FA2's shares equal to their cost basis of $100. This loss is recognized for hybrid surplus purposes, but is nevertheless deemed nil because of the $100 exempt dividend paid prior to the DLAD. Accordingly, no amount in respect of the loss is included in FA1's hybrid surplus calculation.
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