Among the many provisions in the October 24, 2012 pending amendments (see http://www.fin.gc.ca/drleg-apl/nwmm-amvm-1012-eng.asp) are rules that clarify the tax treatment of simple pro rata distributions from a foreign affiliate. Although the default rule is that all such distributions are deemed to be dividends (s. 90(2)), two elective rules are particularly helpful because they generally allow a priority (tax-free) recovery of the adjusted cost base (ACB) of shares of a foreign affiliate. First, where the pro rata distribution is a reduction of paid-up capital (PUC) under the foreign corporate law, an election can be made to treat this not as a dividend but rather as a reduction of the ACB of the shares of the foreign affiliate (s. 90(3), Reg. 5911(6), and s. 53(2)(b)). Second (and alternatively), corporate shareholders of the foreign affiliate can elect, in most cases, to ignore the normal “surplus ordering rules”, and instead deem such dividends to be paid out of “pre-acquisition surplus” (Reg. 5901(2)(b)). Since pre-acquisition surplus dividends are fully deductible from taxable income and reduce the ABC of the shares of the foreign affiliate, this alternate election similarly allows priority (tax-free) access to the ACB of foreign affiliate shares.