In 2012-0445891E5, the CRA confirmed its view that contributed surplus in Canada’s thin capitalization formula is the amount that is, or would be, recognized as contributed surplus under Canadian GAAP. The thin capitalization formula generally places a limit on the amount a Canadian corporation (Canco) may deduct as interest expense on in-bound financing from a non-resident group member, and is determined with reference to Canco’s permitted debt-to-equity ratio (s. 18(4)). The current debt-to-equity ratio is 1.5 to 1. Three components make up Canco’s “equity” for this purpose: specified paid-up capital, retained earnings, and “contributed surplus”. The CRA was asked to confirm how contributed surplus would be computed in the context of a particular reorganization. The CRA first confirmed its long-standing view that contributed surplus of Canco had to be determined under generally-accepted accounting principles (GAAP). The CRA then confirmed that an amount reflected in Canco’s “equity reserves” under international financial reporting standards (IFRS) may also constitute contributed surplus, but only where the amount “would be” so categorized if Canco’s financial statements had been prepared in accordance with Canadian GAAP (i.e., under Part II of the CICA Handbook).