The CRA recently reversed two prior positions in the foreign affiliate context: one on the redemption of preferred shares in a controlled foreign affiliate, the other on the recharacterization rule in s. 95(2)(a)(ii)(D).
- In 2014-0528361E5, the CRA reversed its prior statement in 2012-0439741I7. The CRA (now) agrees that a premium realized by a Canadian parent company (Canco) on the redemption of mandatory redeemable preference shares held in its controlled foreign affiliate results in proceeds of disposition, and not a dividend. Canco may change this result by filing an election under s. 93(1), so as to convert a capital gain into a deemed dividend. Such election can be useful where the deemed dividend would be considered paid from underlying exempt surplus, which is essentially tax free to Canco (s. 113(1)(a)).
- In 2014-0519801I7, the CRA reversed – without explanation – its prior position in 2013-0496841I7. In the latter document, the CRA concluded that s. 95(2)(a)(ii)(D) did not apply to a complex restructuring so as to convert interest income into active business income (in respect of a purchase note). Although not clear from 2014-0519801I7, the CRA may have reversed this prior position based on the words “directly or indirectly” in s. 95(2)(a)(ii).