Bill C-48

Income Tax Regulations

78. (1) Subsection 5900(1) of the Income Tax Regulations is amended by adding the following after paragraph (a):

(2) Subsection 5900(1) of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (c):

(3) Subsections (1) and (2) apply to dividends received after August 19, 2011.

79. (1) Subsections 5901(1) and (2) of the Regulations are replaced by the following:

5901. (1) Subject to subsection (1.1), if at any time in its taxation year a foreign affiliate of a corporation resident in Canada has paid a whole dividend on the shares of any class of its capital stock, for the purposes of this Part

(a) the portion of the whole dividend deemed to have been paid out of the affiliate’s exempt surplus in respect of the corporation at that time is an amount equal to the lesser of

(i) the amount of the whole dividend, and

(ii) the amount, if any, by which the exempt surplus exceeds the total of

(b) the portion of the whole dividend deemed to have been paid out of the affiliate’s taxable surplus in respect of the corporation at that time is an amount equal to the lesser of

(i) the amount, if any, by which the amount of the whole dividend exceeds the total of the portions determined under paragraphs (a) and (a.1), and

(ii) the amount, if any, by which the taxable surplus exceeds

(c) the portion of the whole dividend deemed to have been paid out of the affiliate’s pre-acquisition surplus in respect of the corporation at that time is the amount, if any, by which the whole dividend exceeds the total of the portions determined under paragraphs (a) to (b).

(2) Notwithstanding subsection (1),

(a) if a foreign affiliate of a corporation resident in Canada pays a whole dividend (other than a whole dividend referred to in subsection 5902(1)) at any particular time in its taxation year that is more than 90 days after the commencement of that year or at any particular time in its 1972 taxation year that is before January 1, 1972, the portion of the whole dividend that would, in the absence of this paragraph, be deemed to have been paid out of the affiliate’s pre-acquisition surplus in respect of the corporation (otherwise than because of an election under paragraph (b)) is instead deemed to have been paid out of the exempt surplus, hybrid surplus and taxable surplus of the affiliate in respect of the corporation to the extent that it would have been deemed to have been so paid if, immediately after the end of that year, that portion were paid as a separate whole dividend before any whole dividend paid after the particular time and after any whole dividend paid before the particular time by the affiliate, and for the purposes of determining the exempt deficit, exempt surplus, hybrid deficit, hybrid surplus, hybrid underlying tax, taxable deficit, taxable surplus and underlying foreign tax of the affiliate in respect of the corporation at any time, that portion is deemed to have been paid as a separate whole dividend immediately following the end of the year and not to have been paid at the particular time; and

(2) Subsection (1) applies to dividends paid after August 19, 2011 by a foreign affiliate of a corporation. However,

(a) if the corporation and each other corporation (the corporation and those other corporations together referred to in this paragraph as the “elector corporations”), if any, of which the affiliate would be a foreign affiliate if paragraph (b) of the definition “equity percentage” in subsection 95(4) of the Act were read as if the reference in that paragraph to “any corporation” were a reference to “any corporation other than a corporation resident in Canada” and that is related to the corporation jointly elect in writing under this paragraph in respect of all of their respective foreign affiliates and file the election with the Minister of National Revenue on or before the day that is the later of the earliest of the filing-due dates for their taxation years that include the day on which this Act receives royal assent and the day that is one year after the day on which this Act receives royal assent, subsections 5901(2) to (2.2) of the Regulations, as enacted by subsection (1), apply to dividends paid after December 20, 2002 by all the respective foreign affiliates of the elector corporations, except that, for such dividends paid on or before August 19, 2011,

(i) paragraph 5901(2)(a) of the Regulations, as enacted by subsection (1), is to be read as follows:

(a) if a foreign affiliate of a corporation resident in Canada pays a whole dividend (other than a whole dividend referred to in subsection 5902(1)) at any particular time in its taxation year that is more than 90 days after the commencement of that year or at any particular time in its 1972 taxation year that is before January 1, 1972, the portion of the whole dividend that would, in the absence of this paragraph, be deemed to have been paid out of the affiliate’s pre-acquisition surplus in respect of the corporation (otherwise than because of an election under paragraph (b)) is instead deemed to have been paid out of the exempt surplus and taxable surplus of the affiliate in respect of the corporation to the extent that it would have been deemed to have been so paid if, immediately after the end of that year, that portion were paid as a separate whole dividend before any whole dividend paid after the particular time and after any whole dividend paid before the particular time by the affiliate, and for the purposes of determining the exempt deficit, exempt surplus, taxable deficit, taxable surplus and underlying foreign tax of the affiliate in respect of the corporation at any time, that portion is deemed to have been paid as a separate whole dividend immediately following the end of the year and not to have been paid at the particular time, and

(ii) the portion of paragraph 5901(2)(b) of the Regulations, as enacted by subsection (1), before subparagraph (i) is to be read as follows:

(b) a whole dividend referred to in subsection (1) that is paid at any time by a foreign affiliate of a corporation resident in Canada and that would, in the absence of this paragraph, be deemed under subsection (1) to have been, in whole or in part, paid out of the exempt surplus or taxable surplus of the affiliate in respect of the corporation is instead deemed to have been paid out of the pre-acquisition surplus of the affiliate in respect of the corporation if

(iii) paragraph 5901(2)(b) of the Regulations, as enacted by subsection (1), is to be read without reference to its subparagraph (iii);

(b) any election referred to in subparagraph 5901(2)(b)(i) of the Regulations, as enacted by subsection (1), that would otherwise be required to be filed with the Minister of National Revenue before the day that is 120 days after the day on which this Act receives royal assent is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister within 365 days after the day on which this Act receives royal assent; and

(c) any determination referred to in paragraph 5901(2.1)(a) of the Regulations, as enacted by subsection (1), that would otherwise be required to be made before the day that is 120 days after the day on which this Act receives royal assent is deemed to have been made on a timely basis if it is made within 365 days after the day on which this Act receives royal assent.

80. (1) The portion of subparagraph 5902(1)(a)(i) of the Regulations before clause (A), as enacted by Part 2, is replaced by the following:

(i) the particular affiliate’s exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, underlying foreign tax and net surplus, in respect of the corporation at the dividend time, are deemed to be those amounts that would otherwise be determined immediately before the dividend time if

(2) Paragraph 5902(1)(b) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (i):

(3) Subparagraphs 5902(2)(a)(i) and (ii) of the Regulations, as enacted by Part 2, are replaced by the following:

(ii) if any foreign affiliate of a corporation resident in Canada has issued shares of more than one class of its capital stock, the amount that would be paid as a dividend on the shares of any class is the portion of its net surplus that, in the circumstances, it might reasonably be expected to have paid on all the shares of the class, and

(4) The portion of subsection 5902(6) of the Regulations before paragraph (a) is replaced by the following:

(6) If at any time a corporation resident in Canada is deemed under subsection 93(1.11) of the Act to have made an election under subsection 93(1) of the Act in respect of a disposition of a share of the capital stock of a particular foreign affiliate of the corporation, the prescribed amount is the lesser of

(5) Subsections (1) to (3) apply in respect of elections in respect of dispositions of shares of the capital stock of a foreign affiliate of a taxpayer that occur after August 19, 2011.

(6) Subsection (4) applies in respect of elections in respect of dispositions of shares of the capital stock of a foreign affiliate of a corporation that occur after August 19, 2011. However, if the corporation elects under paragraph 79(2)(a), subsection (4) applies in respect of elections in respect of dispositions of shares of the capital stock of all foreign affiliates of the corporation that occur after December 20, 2002.

81. (1) Paragraph 5903(3)(a) of the Regulations, as enacted by Part 2, is replaced by the following:

(a) where, at the end of the year, the affiliate is a controlled foreign affiliate of a person or partnership that is, at the end of the year, a relevant person or partnership in respect of the taxpayer, the amount, if any, determined by the formula

(2) Subsection 5903(4) of the Regulations, as enacted by Part 2, is replaced by the following:

(4) In computing under subsection (3) the foreign accrual property loss of the affiliate for a taxation year, if the affiliate or another corporation receives a payment described in subsection 5907(1.3) from a non-resident corporation that is, at the time of the payment, a foreign affiliate of a relevant person or partnership in respect of the taxpayer and any portion of the payment can reasonably be considered to relate to a loss or portion of a loss of the affiliate for the year described in the description of D in the definition “foreign accrual property income” in subsection 95(1) of the Act, the amount of the loss or portion of the loss is deemed to be nil.

(3) The portion of subsection 5903(5) of the Regulations before paragraph (a), as enacted by Part 2, is replaced by the following:

(5) For the purposes of this section and section 5903.1,

(4) Paragraphs 5903(5)(a) and (b) of the Regulations, as enacted by Part 2, are replaced by the following:

(5) The portion of subsection 5903(6) of the Regulations before paragraph (a), as enacted by Part 2, is replaced by the following:

(6) In this section and section 5903.1, a “relevant person or partnership”, in respect of the taxpayer at any time, means the taxpayer or a person (other than a designated acquired corporation of the taxpayer), or a partnership, that is at that time

(6) Subsections (1) to (3) and (5) apply in respect of capital losses of a foreign affiliate of a taxpayer that are incurred in taxation years of the foreign affiliate that end after August 19, 2011.

(7) Subsection (4) applies in respect of mergers or combinations that occur, and liquidations and dissolutions that begin, in respect of a foreign affiliate of a taxpayer, after August 19, 2011. However,

(a) if the taxpayer has elected under subsection 70(31),

(i) paragraph 5903(5)(a) of the Regulations, as enacted by subsection (4), also applies in respect of mergers or combinations in respect of all foreign affiliates of the taxpayer that occur after December 20, 2002 and on or before August 19, 2011, and

(ii) that paragraph is, for such mergers or combinations, to be read as follows:

(a) if paragraph 95(2)(d.1) of the Act applies to a foreign merger, the new foreign corporation referred to in that paragraph is deemed to be the same corporation as, and a continuation of, each foreign affiliate predecessor; and

(b) if the taxpayer has elected under subsection 70(28),

(i) paragraph 5903(5)(b) of the Regulations, as enacted by subsection (4), also applies in respect of liquidations and dissolutions of all foreign affiliates of the taxpayer that begin after December 20, 2002 and on or before August 19, 2011, and

(ii) that paragraph is, in respect of such liquidations and dissolutions, to be read as follows:

(b) if paragraph 95(2)(e) of the Act applies to a liquidation and dissolution, of a disposing affiliate referred to in that paragraph, that is a designated liquidation and dissolution of the disposing affiliate, the shareholder affiliate referred to in that paragraph is deemed to be the same corporation as, and a continuation of, the disposing affiliate.

82. (1) The Regulations are amended by adding the following after section 5903:

(2) Subsection (1) applies in respect of capital losses of a foreign affiliate of a taxpayer that are incurred in taxation years of the foreign affiliate that end after August 19, 2011.

83. (1) Paragraph 5904(1)(c) of the Regulations is replaced by the following:

(c) the direct equity percentage of a person in any foreign affiliate of the taxpayer, for which the total of the distribution entitlements of all the shares of all classes of the capital stock of the affiliate would not, in the absence of this paragraph, be greater than nil, was determined on the assumption that the amount determined under subparagraph (2)(b)(i) were the greater of

(2) Paragraph 5904(3)(b) of the Regulations is replaced by the following:

(b) if a particular foreign affiliate of a corporation has an equity percentage (within the meaning assigned by subsection 95(4) of the Act) in another foreign affiliate of the corporation that has an equity percentage in the particular affiliate, the net surplus of, or the amount of a distribution received by, the particular affiliate is to be determined in a manner that is

(3) Subsections (1) and (2) apply in respect of taxation years of a foreign affiliate of a taxpayer that begin after August 19, 2011.

84. (1) The portion of subsection 5905(1) of the Regulations before the formula, as enacted by Part 2, is replaced by the following:

5905. (1) If, at any time, there is an acquisition or a disposition of shares of the capital stock of a particular foreign affiliate of a corporation resident in Canada and the surplus entitlement percentage of the corporation in respect of the particular foreign affiliate or any other foreign affiliate (the particular affiliate and those other affiliates each being referred to in this subsection as a “relevant affiliate”) of the corporation in which the particular affiliate has an equity percentage (within the meaning assigned by subsection 95(4) of the Act) changes, for the purposes of the definitions “exempt surplus”, “hybrid surplus”, “hybrid underlying tax”, “taxable surplus”, and “underlying foreign tax” in subsection 5907(1), each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, as the case may be, of the relevant affiliate in respect of the corporation is, except where the acquisition or disposition occurs in a transaction to which paragraph (3)(a) or subsection (5) or (5.1) applies, the amount determined at that time by the formula

(2) The portion of paragraph 5905(3)(a) of the Regulations before subparagraph (i), as enacted by Part 2, is replaced by the following:

(a) for the purposes of the definitions “exempt surplus”, “hybrid surplus”, “hybrid underlying tax”, “taxable surplus” and “underlying foreign tax” in subsection 5907(1), as they apply in respect of the merged affiliate,

(3) Paragraph 5905(3)(a) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (ii):

(4) The portion of subparagraph 5905(3)(b)(i) of the Regulations before the formula, as enacted by Part 2, is replaced by the following:

(i) each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit and underlying foreign tax, in respect of the corporation, of each predecessor corporation immediately before the merger time is deemed to be the amount determined by the formula

(5) The portion of paragraph 5905(5)(a) of the Regulations before subparagraph (i), as enacted by Part 2, is replaced by the following:

(a) each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, in respect of the acquiring corporation, of the particular affiliate and of each foreign affiliate of the disposing corporation in which the particular affiliate has, immediately before that time, an equity percentage (within the meaning assigned by subsection 95(4) of the Act) is deemed to be the amount, if any,

(6) Paragraph 5905(5)(a) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (ii):

(7) The portion of paragraph 5905(5)(b) of the Regulations before the formula, as enacted by Part 2, is replaced by the following:

(b) for the purposes of paragraph (a), each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of the disposing corporation and the acquiring corporation, determined immediately before that time, is deemed to be the amount determined by the formula

(8) Paragraphs 5905(5)(c) and (d) of the Regulations, as enacted by Part 2, are replaced by the following:

(c) if the disposing corporation makes an election under subsection 93(1) of the Act in respect of the disposed shares,

(i) for the purposes of paragraph (b), the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of the disposing corporation, as determined without reference to this subsection, immediately before that time, shall be adjusted in accordance with paragraph 5902(1)(b) as if the disposing corporation’s surplus entitlement percentage that is referred to in the description of B in paragraph 5902(2)(b) were determined as if the disposed shares were the only shares owned by the disposing corporation immediately before that time, and

(ii) no adjustment shall be made to the amount of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, or underlying foreign tax of an affiliate in respect of the disposing corporation under paragraph 5902(1)(b) other than for the purpose of paragraph (b); and

(d) for greater certainty, no adjustment shall be made under subsection (1) to the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, or underlying foreign tax of an affiliate in respect of the disposing corporation.

(9) The portion of paragraph 5905(5.1)(a) of the Regulations before subparagraph (i), as enacted by Part 2, is replaced by the following:

(a) each of the opening exempt surplus or opening exempt deficit, opening hybrid surplus or opening hybrid deficit, opening hybrid underlying tax, opening taxable surplus or opening taxable deficit, and opening underlying foreign tax, in respect of the new corporation, of the particular affiliate and of each foreign affiliate of the predecessor corporation in which the particular affiliate has, immediately before that time, an equity percentage (within the meaning assigned by subsection 95(4) of the Act) is deemed to be the amount, if any,

(10) Paragraph 5905(5.1)(a) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (ii):

(11) The portion of paragraph 5905(5.1)(b) of the Regulations before the formula, as enacted by Part 2, is replaced by the following:

(b) for the purpose of paragraph (a), each of the exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax of an affiliate in respect of a predecessor corporation, determined immediately before that time, is deemed to be the amount determined by the formula

(12) Paragraph 5905(5.5)(a) of the Regulations, as enacted by Part 2, is replaced by the following:

(a) the amount, if any, by which the affiliate’s exempt surplus in respect of the corporation at that time exceeds the total of

(ii) the affiliate’s taxable deficit, if any, in respect of the corporation at that time;

(a.1) the amount, if any, by which the amount of the affiliate’s hybrid surplus in respect of the corporation at that time exceeds the amount determined under subsection (5.7) in respect of the corporation at that time if, at that time, the amount of that hybrid surplus is less than or equal to the amount determined by the formula

(13) Subparagraph 5905(5.5)(b)(ii) of the Regulations, as enacted by Part 2, is replaced by the following:

(ii) the amount, if any, by which the affiliate’s taxable surplus in respect of the corporation at that time exceeds

(14) Subsection 5905(5.6) of the Regulations, as enacted by Part 2, is replaced by the following:

(5.6) For the purposes of subsection (5.5), the amounts of exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax, of a foreign affiliate of corporation resident in Canada, in respect of the corporation, at a particular time are those amounts that would be determined, at the particular time, under subparagraph 5902(1)(a)(i) if that subparagraph were applicable at the particular time and the references in that subparagraph to “the dividend time” were references to the particular time.

(5.7) For the purposes of paragraph (5.5)(a.1), the amount determined under this subsection in respect of the corporation at any time is

(15) Subsection 5905(7) of the Regulations is replaced by the following:

(7) If at any time there has been a liquidation and dissolution of a foreign affiliate (referred to in this subsection as the “dissolved affiliate”) of a corporation resident in Canada that is a designated liquidation and dissolution (within the meaning assigned by subsection 95(1) of the Act) of the dissolved affiliate, each other foreign affiliate of the corporation that had a direct equity percentage (within the meaning assigned by subsection 95(4) of the Act) in the dissolved affiliate immediately before that time is, for the purposes of computing its exempt surplus or exempt deficit, hybrid surplus or hybrid deficit, hybrid underlying tax, taxable surplus or taxable deficit, and underlying foreign tax, in respect of the corporation, deemed to have received dividends immediately before that time the total of which is equal to the amount it might reasonably have expected to receive if the dissolved affiliate had, immediately before that time, paid dividends on all shares of its capital stock the total of which was equal to the amount of its net surplus in respect of the corporation immediately before that time, determined on the assumption that the taxation year of the dissolved affiliate that otherwise would have included that time had ended immediately before that time.

(16) Subsection 5905(11) of the Regulations is replaced by the following:

(11) For the purposes of subsection (10),

(b) if any foreign affiliate of a corporation resident in Canada has issued shares of more than one class of its capital stock, the amount that would be paid as a dividend on the shares of any class is the portion of its net surplus that, in the circumstances, it might reasonably be expected to have paid on all the shares of that class; and

(c) if the particular affiliate’s net surplus as determined for the purposes of subsection (10) would, in the absence of this paragraph, be nil the particular affiliate’s net surplus for the purposes of that subsection is deemed to be the greater of

(17) Subsection 5905(12) of the Regulations is repealed.

(18) Paragraph 5905(13)(a) of the Regulations is replaced by the following:

(a) the percentage that is the corporation’s equity percentage in the particular affiliate at that time if

(i) the particular affiliate and each corporation that is relevant to the determination of the corporation’s equity percentage in the particular affiliate have, at that time, only one class of issued shares, and

(ii) no foreign affiliate (referred to in this subparagraph as the “upper-tier affiliate”) of the corporation that is relevant to the determination of the corporation’s equity percentage in the particular affiliate has, at that time, an equity percentage in a foreign affiliate (including, for greater certainty, the particular affiliate) of the corporation that has an equity percentage in the upper-tier affiliate; and

(19) The portion of subsection 5905(13) of the Regulations after subparagraph (b)(ii) is repealed.

(20) Section 5905 of the Regulations is amended by adding the following after subsection (13):

(21) Subsection (1) applies in respect of acquisitions and dispositions that occur after August 19, 2011.

(22) Subsections (2) to (14), (16) and (18) to (20) are deemed to have come into force on August 20, 2011.

(23) Subsection (15) applies in respect of liquidations and dissolutions of foreign affiliates of a taxpayer that begin after August 19, 2011. However, if the taxpayer has elected under subsection 70(28),

(a) subsection (15) applies in respect of all liquidations and dissolutions of foreign affiliates of the taxpayer that begin after December 20, 2002; and

(b) subsection 5905(7) of the Regulations, as enacted by subsection (15), is, in respect of all such liquidations and dissolutions that begin on or before August 19, 2011, to be read as follows:

(7) If at any time there has been a liquidation and dissolution of a foreign affiliate (referred to in this subsection as the “dissolved affiliate”) of a corporation resident in Canada that is a designated liquidation and dissolution (within the meaning assigned by subsection 95(1) of the Act) of the dissolved affiliate, each other foreign affiliate of the corporation that had a direct equity percentage (within the meaning assigned by subsection 95(4) of the Act) in the dissolved affiliate immediately before that time is, for the purposes of computing its exempt surplus or exempt deficit, taxable surplus or taxable deficit, and underlying foreign tax, in respect of the corporation, deemed to have received dividends immediately before that time the total of which is equal to the amount it might reasonably have expected to receive if the dissolved affiliate had, immediately before that time, paid dividends on all shares of its capital stock the total of which was equal to the amount of its net surplus in respect of the corporation immediately before that time, determined on the assumption that the taxation year of the dissolved affiliate that otherwise would have included that time had ended immediately before that time.

(24) Subsection (17) is deemed to have come into force on December 19, 2009.

85. (1) Paragraph (b) of the definition “earnings” in subsection 5907(1) of the Regulations, as enacted by Part 2, is replaced by the following:

(b) in any other case, the total of all amounts each of which is an amount of income that would be required under paragraph 95(2)(a) of the Act to be included in computing the affiliate’s income or loss from an active business for the year if that income were computed taking into account the rules in subsection (2.03); (gains)

(2) The portion of the definition “exempt earnings” in subsection 5907(1) of the Regulations before subparagraph (a)(iii), as amended by Part 2, is replaced by the following:

“exempt earnings”, of a particular foreign affiliate of a particular corporation for a taxation year of the particular affiliate, means, subject to subsection (2.02), the total of all amounts each of which is

(a) the amount by which the capital gains of the particular affiliate for the year (other than capital gains included in computing the amount, at any time in the year, of the particular affiliate’s hybrid surplus, or hybrid deficit, in respect of the particular corporation) exceed the total of

(i) the amount of the taxable capital gains for the year referred to in the description of B in the definition “foreign accrual property income” in subsection 95(1) of the Act,

(ii) the amount of the taxable capital gains for the year referred to in subparagraphs (c)(i), (e)(i) and (f)(iv) of the definition “net earnings”, and

(3) The portion of the definition “exempt loss” in subsection 5907(1) of the Regulations before subparagraph (a)(iii), as amended by Part 2, is replaced by the following:

“exempt loss”, of a foreign affiliate of a corporation for a taxation year of the affiliate, means, subject to subsection (2.02), the total of all amounts each of which is

(a) the amount by which the capital losses of the affiliate for the year (other than capital losses included in computing the amount, at any time in the year, of the particular affiliate’s hybrid surplus, or hybrid deficit, in respect of the particular corporation) exceed the total of

(i) the amount of the allowable capital losses for the year referred to in the description of E in the definition “foreign accrual property income” in subsection 95(1) of the Act,

(ii) the amount of the allowable capital losses for the year referred to in subparagraphs (c)(i), (e)(i) and (f)(iv) of the definition “net loss”, and

(4) The portion of the definition “exempt surplus” in subsection 5907(1) of the Regulations before paragraph (a) is replaced by the following:

“exempt surplus”, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the latest of the following times and that ends with the particular time:

(5) The portion of the definition “exempt surplus” in subsection 5907(1) of the English version of the Regulations after paragraph (c) and before the description of A is replaced by the following:

A – B

where

(6) Subparagraph (vii) of the description of A in the definition “exempt surplus” in subsection 5907(1) of the Regulations is replaced by the following:

(vii) an amount added, in the period and before the particular time, to the exempt surplus of the subject affiliate under paragraph (7.1)(d) (as that paragraph applied to dividends paid on or before August 19, 2011), and

(7) Paragraph (b) of the definition “loss” in subsection 5907(1) of the Regulations, as enacted by Part 2, is replaced by the following:

(b) in any other case, the total of all amounts each of which is an amount of a loss that would be required under paragraph 95(2)(a) of the Act to be included in computing the affiliate’s income or loss from an active business for the year if that loss were computed taking into account the rules in subsection (2.03);

(8) Paragraph (b) of the definition “net earnings” in subsection 5907(1) of the Regulations is replaced by the following:

(b) in respect of foreign accrual property income is the amount that would be its foreign accrual property income for the year, if the formula in the definition “foreign accrual property income” in subsection 95(1) of the Act were read without reference to F and F.1 in that formula and the amount determined for E in that formula were the amount determined under paragraph (a) of the description of E in that formula, minus the portion of any income or profits tax paid to the government of a country for the year by the affiliate that can reasonably be regarded as tax in respect of that income,

(9) Subparagraphs (d)(i) and (ii) of the definition “net earnings” in subsection 5907(1) of the Regulations are replaced by the following:

(i) shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which any of paragraphs 95(2)(c) to (e) of the Act was applicable and dispositions in respect of which the amount of the capital gain is included in computing the amount, at any time in the year, of the affiliate’s hybrid surplus, or hybrid deficit, in respect of the corporation), or

(ii) partnership interests that were excluded property of the affiliate (other than dispositions in respect of which the amount of the capital gain is included in computing the amount, at any time in the year, of the affiliate’s hybrid surplus, or hybrid deficit, in respect of the corporation)

(10) Paragraph (d) of the definition “net earnings” in subsection 5907(1) of the Regulations, as amended by subsection (9), is repealed.

(11) Clause (b)(i)(A) of the definition “net loss” in subsection 5907(1) of the Regulations is replaced by the following:

(A) the total of

(I) the amount determined for D in the formula in the definition “foreign accrual property income” in subsection 95(1) of the Act for the year,

(12) Subparagraphs (d)(i) and (ii) of the definition “net loss” in subsection 5907(1) of the Regulations are replaced by the following:

(i) shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which paragraph 95(2)(c), (d) or (e) of the Act was applicable and dispositions in respect of which the amount of the capital loss is included in computing the amount, at any time in the year, of the affiliate’s hybrid surplus, or hybrid deficit, in respect of the corporation), or

(ii) partnership interests that were excluded property of the affiliate (other than dispositions in respect of which the amount of the capital loss is included in computing the amount, at any time in the year, of the affiliate’s hybrid surplus, or hybrid deficit, in respect of the corporation)

(13) Paragraph (d) of the definition “net loss” in subsection 5907(1) of the Regulations, as amended by subsection (12), is repealed.

(14) Paragraphs (a) to (c) of the definition “net surplus” in subsection 5907(1) of the Regulations are replaced by the following:

(15) Paragraph (b) of the definition “taxable earnings” in subsection 5907(1) of the Regulations, as amended by Part 2, is amended by striking out “or” at the end of subparagraph (iii), adding “or” at the end of subparagraph (iv) and adding the following after subparagraph (iv):

(16) The portion of the definition “taxable surplus” in subsection 5907(1) of the Regulations before paragraph (a) is replaced by the following:

“taxable surplus”, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the latest of the following times and that ends with the particular time:

(17) The portion of the definition “taxable surplus” in subsection 5907(1) of the English version of the Regulations after paragraph (c) and before the description of A is replaced by the following:

A – B

where

(18) Subparagraph (v) of the description of A in the definition “taxable surplus” in subsection 5907(1) of the Regulations is replaced by the following:

(v) an amount added, in the period and before the particular time, to the subject affiliate’s taxable surplus under paragraph (7.1)(e) (as that paragraph applied to dividends paid on or before August 19, 2011), and

(19) Subparagraph (iv) of the description of B in the definition “taxable surplus” in subsection 5907(1) of the Regulations is replaced by the following:

(iv) the portion of any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(b) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(a.1) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation,

(20) The portion of the definition “underlying foreign tax” in subsection 5907(1) of the Regulations before paragraph (a) is replaced by the following:

“underlying foreign tax”, of a foreign affiliate (in this definition referred to as the “subject affiliate”) of a corporation in respect of the corporation, at any particular time, means the amount determined by the following formula in respect of the period that begins with the later of the following times and that ends with the particular time:

(21) The portion of the definition “underlying foreign tax” in subsection 5907(1) of the English version of the Regulations, as amended by Part 2, after paragraph (b) and before the description of A is replaced by the following:

A – B

where

(22) Subparagraph (ii) of the description of A in the definition “underlying foreign tax” in subsection 5907(1) of the Regulations is replaced by the following:

(ii) the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of the taxable earnings, including for greater certainty any amounts included because of paragraph (2.02)(a) in computing the taxable earnings, of the affiliate for a taxation year ending in the period,

(23) Subparagraph (ii) of the description of B in the definition “underlying foreign tax” in subsection 5907(1) of the Regulations is replaced by the following:

(ii) the underlying foreign tax applicable to any whole dividend paid by the subject affiliate in the period and before the particular time deemed under paragraph 5901(1)(b) or, if subsection 5901(1.1) applied to the whole dividend, paragraph 5901(1)(a.1) to have been paid out of the subject affiliate’s taxable surplus in respect of the corporation before that time,

(24) Subsection 5907(1) of the Regulations is amended by adding the following in alphabetical order:

(25) Subsection 5907(1.01) of the Regulations is replaced by the following:

(1.01) For the purposes of section 113 of the Act, “exempt surplus”, “hybrid surplus” and “taxable surplus” have the meanings assigned by subsection (1).

(26) Subparagraph 5907(1.1)(a)(iv) of the Regulations is amended by striking out “and” at the end of clause (A) and adding the following after clause (A):

(27) Subparagraph 5907(1.1)(a)(v) of the Regulations is amended by striking out “and” at the end of clause (C) and adding the following after clause (C):

(28) Clause 5907(1.1)(b)(i)(B) of the Regulations is amended by striking out “and” at the end of subclause (I) and adding the following after subclause (I):

(29) Clause 5907(1.1)(b)(ii)(A) of the Regulations, as enacted by Part 2, is amended by striking out “and” at the end of subclause (I) and adding the following after subclause (I):

(30) Paragraph 5907(1.2)(c) of the Regulations is amended by striking out “and” at the end of subparagraph (i) and adding the following after subparagraph (i):

(31) Subparagraph 5907(1.2)(d)(i) of the Regulations is amended by striking out “and” at the end of clause (A) and adding the following after clause (A):

(32) Subsection 5907(1.4) of the Regulations, as enacted by Part 2, is replaced by the following:

(1.4) If the amount prescribed under paragraph (1.3)(a) or (b), or any portion of the amount, can reasonably be considered to be in respect of a particular loss (other than a capital loss) or a capital loss of another corporation for a taxation year of the other corporation, then the amount so prescribed is to be reduced to the extent that it can reasonably be considered to be in respect of the portion of the particular loss or capital loss, as the case may be, that would, if sections 5903 and 5903.1 were read without reference to their subsection (4), not be a foreign accrual property loss (within the meaning assigned by subsection 5903(3)), or a foreign accrual capital loss (within the meaning assigned by subsection 5903.1(3)), as the case may be, of a controlled foreign affiliate of a person or partnership that is, at the end of that taxation year, a relevant person or partnership (within the meaning assigned by subsection 5903(6)) in respect of the taxpayer.

(33) Section 5907 of the Regulations is amended by adding the following after subsection (1.6), as enacted by Part 2:

(34) Subparagraph 5907(2)(f)(ii) of the Regulations is replaced by the following:

(ii) subject to subsection (2.01), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies), of property by the affiliate,

(B) to which a tax deferral, rollover or similar tax postponement provision of the income tax laws that are relevant in computing the earnings amount of the affiliate applied, and

(35) Subparagraph 5907(2)(j)(iii) of the Regulations is replaced by the following:

(iii) subject to subsection (2.01), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies), of property by the affiliate,

(A) to a person or partnership that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer, and

(B) to which a loss deferral or similar loss postponement provision of the income tax laws that are relevant in computing the earnings amount of the affiliate applied, and

(36) Paragraph 5907(2)(l) of the Regulations is replaced by the following:

(l) if any property of the affiliate that was acquired from a person or partnership that was, at the time of the acquisition, a designated person or partnership in respect of the taxpayer has been disposed of, the amount in respect of that property that may reasonably be considered as having been included under paragraph (f) in computing the earnings amount of any foreign affiliate of the taxpayer or of a person or partnership that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer.

(37) Section 5907 of the Regulations is amended by adding the following after subsection (2):

(38) Subsection 5907(2.9) of the Regulations is replaced by the following:

(39) Subsection 5907(5) of the Regulations, as enacted by Part 2, is replaced by the following:

(5) For the purposes of this section, each capital gain, capital loss, taxable capital gain or allowable capital loss of a foreign affiliate of a taxpayer from the disposition of property is to be computed in accordance with the rules set out in subsection 95(2) of the Act.

(40) The portion of subsection 5907(5.1) of the Regulations before paragraph (a) is replaced by the following:

(5.1) Notwithstanding subsection (5), if, under the income tax laws of a country other than Canada that are relevant in computing the earnings of a foreign affiliate of a taxpayer resident in Canada from an active business carried on by it in a country, no gain or loss is recognized in respect of a disposition (other than a disposition to which subsection (9) applies) by the affiliate of a capital property used or held principally for the purpose of gaining or producing income from an active business to a person or partnership (in this subsection referred to as the “transferee”) that was, at the time of the disposition, a designated person or partnership in respect of the taxpayer, for the purposes of this section,

(41) Subsection 5907(7.1) of the Regulations is repealed.

(42) Subsection 5907(8) of the Regulations is replaced by the following:

(8) For the purposes of computing the various amounts referred to in this section, the first taxation year of a foreign affiliate, of a corporation resident in Canada, that is formed as a result of a foreign merger (within the meaning assigned by subsection 87(8.1) of the Act) is deemed to have commenced at the time of the merger, and a taxation year of a predecessor corporation (within the meaning assigned by subsection 5905(3)) that would otherwise have ended after that time is deemed to have ended immediately before that time.

(43) Subsection 5907(9) of the Regulations is replaced by the following:

(9) If a foreign affiliate of a taxpayer has been liquidated and dissolved (otherwise than as a result of a foreign merger within the meaning assigned by subsection 87(8.1) of the Act), for the purposes of computing the various amounts referred to in this section, the following rules apply:

(44) Subsection 5907(13) of the Regulations is replaced by the following:

(45) Subsections (1), (7), (8), (11), (15), (22) and (26) to (33) and subsection 5907(2.03) of the Regulations, as enacted by subsection (37), apply in respect of taxation years of a foreign affiliate of a taxpayer that end after August 19, 2011.

(46) Subsection (2) applies in respect of taxation years of a foreign affiliate of a taxpayer that end after August 19, 2011, except that, for taxation years of the foreign affiliate that begin before 2013, subparagraph (a)(ii) of the definition “exempt earnings” in subsection 5907(1) of the Regulations, as enacted by subsection (2), is to be read as follows:

(ii) the amount of the taxable capital gains for the year referred to in subparagraphs (c)(i), (d)(iii), (e)(i) and (f)(iv) of the definition “net earnings”, and

(47) Subsection (3) applies in respect of taxation years of a foreign affiliate of a taxpayer that end after August 19, 2011, except that, for taxation years of the foreign affiliate that begin before 2013, subparagraph (a)(ii) of the definition “exempt loss” in subsection 5907(1) of the Regulations, as enacted by subsection (3), is to be read as follows:

(ii) the amount of the allowable capital losses for the year referred to in subparagraphs (c)(i), (d)(iii), (e)(i) and (f)(iv) of the definition “net loss”, and

(48) Subsections (4) to (6), (14), (16) to (21), (23), (25), (39) and (41) are deemed to have come into force on August 20, 2011.

(49) Subsections (9) and (12) apply in respect of taxation years of a foreign affiliate of a taxpayer that end after August 19, 2011. However, if the taxpayer has elected under subsection 70(31), subsection (9) also applies to all mergers or combinations in respect of foreign affiliates of the taxpayer that occur after December 20, 2002 and in taxation years of those foreign affiliates that end on or before August 19, 2011 and, in respect of those mergers or combinations, subparagraphs (d)(i) and (ii) of the definition “net earnings” in subsection 5907(1) of the Regulations, as enacted by subsection (9), are to be read as follows:

(i) shares of the capital stock of another foreign affiliate of the corporation that were excluded property of the affiliate (other than dispositions to which any of paragraphs 95(2)(c) to (e) of the Act was applicable), or

(ii) partnership interests that were excluded property of the affiliate

(50) Subsections (10) and (13) apply to taxation years of a foreign affiliate of a taxpayer that begin after 2012.

(51) Subsection (24) is deemed to have come into force on August 20, 2011. However, in respect of dispositions that occur after August 19, 2011 and before 2013,

(a) the portion of subparagraph (ii) of the description of A in the definition “hybrid surplus” in subsection 5907(1) of the Regulations before clause (A), as enacted by subsection (24), is to be read as follows:

(ii) the amount of a capital gain (except to the extent that the taxable portion of the capital gain is included under the description of B in the definition “foreign accrual property income” in subsection 95(1) of the Act in respect of the subject affiliate), for a taxation year, of the subject affiliate, or of a partnership of which the subject affiliate is a member (to the extent that the capital gain is reasonably attributable to the subject affiliate), in respect of a disposition, at any time in the period, to a person or partnership that was, at that time, a designated person or partnership in respect of the corporation, of

(b) the portion of subparagraph (ii) of the description of B in the definition “hybrid surplus” in subsection 5907(1) of the Regulations before clause (A), as enacted by subsection (24), is to be read as follows:

(ii) the amount of a capital loss (except to the extent that the allowable portion of the capital loss is included under paragraph (a) of the description of E in the definition “foreign accrual property income” in subsection 95(1) of the Act in respect of the subject affiliate), for a taxation year, of the subject affiliate, or of a partnership of which the subject affiliate is a member (to the extent that the capital loss is reasonably attributable to the subject affiliate), in respect of a disposition, at any time in the period, to a person or partnership that was, at that time, a designated person or partnership in respect of the corporation, of

(c) section 5907 of the Regulations is to be read as if it contained a subsection (1.001) that reads as follows:

(1.001) For the purposes of subparagraph (ii) of the description of A, and subparagraph (ii) of the description of B, in the definition “hybrid surplus” in subsection (1)

(a) if a foreign affiliate of a corporation redeems, acquires or cancels shares of its capital stock those shares are, for greater certainty, deemed to be disposed of to the affiliate by the person or partnership that, immediately before the redemption, acquisition or cancellation, holds those shares;

(b) if a partnership redeems, acquires or cancels interests in the partnership those interests are, for greater certainty, deemed to be disposed of to the partnership by the person or partnership that, immediately before the redemption, acquisition or cancellation, holds those interests; and

(c) if a person or partnership is deemed under subsection 40(3) of the Act to have disposed of shares of the capital stock of a corporation, the person or partnership is deemed to have disposed of those shares to itself.

(52) Subsections (34) to (36) apply in respect of dispositions of property by a foreign affiliate of a taxpayer that occur after August 19, 2011. However, if the taxpayer has elected under subsection (53),

(a) subparagraph 5907(2)(f)(ii) of the Regulations, as enacted by subsection (34), and subparagraph 5907(2)(j)(iii) of the Regulations, as enacted by subsection (35), apply in respect of dispositions of property by all foreign affiliates of the taxpayer that occur after December 20, 2002;

(b) that subparagraph 5907(2)(f)(ii) is, in respect of all such dispositions that occur on or before August 19, 2011, to be read as follows:

(ii) subject to subsection (2.01), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies) by the affiliate of property to another foreign affiliate of the taxpayer or to a person with whom the taxpayer does not deal at arm’s length, to which a tax deferral, rollover or similar tax postponement provision of the income tax law that is relevant in computing the earnings amount of the affiliate applied, and

(c) that subparagraph 5907(2)(j)(iii) is, in respect of all such dispositions that occur on or before August 19, 2011, to be read as follows:

(iii) subject to subsection (2.01), does not arise with respect to a disposition (other than a disposition to which subsection (9) applies) by the affiliate of property to another foreign affiliate of the taxpayer or to a person with whom the taxpayer does not deal at arm’s length, to which a loss deferral or similar loss postponement provision of the income tax law that is relevant in computing the earnings amount of the affiliate applied, and

(53) Subsection 5907(2.01) of the Regulations, as enacted by subsection (37), applies to dispositions by a foreign affiliate of a taxpayer that occur after August 19, 2011. However, if the taxpayer elects in writing under this subsection in respect of all of its foreign affiliates and files the election with the Minister of National Revenue on or before the day that is the later of the taxpayer’s filing-due date for the taxpayer’s taxation year that includes the day on which this Act receives royal assent and the day that is one year after the day on which this Act receives royal assent, that subsection 5907(2.01) applies to dispositions by all foreign affiliates of the taxpayer that occur after December 20, 2002.

(54) Subsection 5907(2.02) of the Regulations, as enacted by subsection (37), applies in respect of transactions (within the meaning of subsection 245(1) of the Act) that are entered into after August 19, 2011.

(55) Subsection (38) applies in respect of taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002. However, if the taxpayer has elected under paragraph 70(29)(b), subsection (38) applies in respect of taxation years of all foreign affiliates of the taxpayer that begin after 1994.

(56) Subsection (40) applies to dispositions that occur after August 19, 2011.

(57) Subsection (42) applies in respect of mergers or combinations in respect of a foreign affiliate of a taxpayer that occur after August 19, 2011.

(58) Subsection 5907(9) of the Regulations, as enacted by subsection (43), applies in respect of liquidations and dissolutions of foreign affiliates of a taxpayer that begin after December 20, 2002, except that

(a) if the taxpayer has elected under subsection 70(28), paragraph 5907(9)(b) of the Regulations, as enacted by subsection (43), is, in respect of liquidations and dissolutions of all foreign affiliates of the taxpayer that begin on or before February 27, 2004, to be read as follows:

(b) each property of the affiliate that was disposed of by the affiliate in the course of the liquidation and dissolution is, subject to subsection 88(3) of the Act, deemed to have been

(i) disposed of by the affiliate, at the time that is the earlier of the time it was actually disposed of and the time that is immediately before the time that is immediately before the particular time, for proceeds of disposition equal to

(A) if the liquidation and dissolution is one to which paragraph 95(2)(e) of the Act applies in respect of the disposition, the amount determined under subparagraph 95(2)(e)(i) or (ii) of the Act, and

(B) in any other case, the fair market value of the property at the time it was actually disposed of, and

(ii) acquired by the person or partnership to which the affiliate disposed of the property, at the time it was actually acquired, at a cost equal to the affiliate’s proceeds of disposition of the property.

(b) if the taxpayer has not elected under subsection 70(28), paragraph 5907(9)(b) of the Regulations, as enacted by subsection (43), is, in respect of liquidations and dissolutions of foreign affiliates of the taxpayer that

(i) begin on or before February 27, 2004, to be read as follows:

(b) each property of the affiliate that was disposed of by the affiliate in the course of the liquidation and dissolution is, subject to subsection 88(3) and paragraphs 95(2)(e) and (e.1) of the Act, deemed to have been

(i) disposed of by the affiliate, at the time that is the earlier of the time it was actually disposed of and the time that is immediately before the time that is immediately before the particular time, for proceeds of disposition equal to the fair market value of the property at the time it was actually disposed of, and

(ii) acquired by the person or partnership to which the affiliate disposed of the property, at the time it was actually acquired, at a cost equal to the affiliate’s proceeds of disposition of the property.

(ii) begin after February 27, 2004 and on or before August 19, 2011, to be read as follows:

(b) each property of the affiliate that was disposed of by the affiliate in the course of the liquidation and dissolution is, subject to paragraphs 95(2)(e) and (e.1) of the Act, deemed to have been

(i) disposed of by the affiliate, at the time that is the earlier of the time it was actually disposed of and the time that is immediately before the time that is immediately before the particular time, for proceeds of disposition equal to

(A) if the liquidation and dissolution is one to which subsection 88(3) of the Act applies in respect of the disposition, the amount that would (in the absence of subsection 88(3.3) of the Act) be determined under paragraph 88(3)(a) or (b) of the Act, as the case may be, and

(B) in any other case, the fair market value of the property at the time it was actually disposed of, and

(ii) acquired by the person or partnership to which the affiliate disposed of the property, at the time it was actually acquired, at a cost equal to the affiliate’s proceeds of disposition of the property.

(59) Subsection 5907(9.1) of the Regulations, as enacted by subsection (43), applies to mergers or combinations in respect of a foreign affiliate of a taxpayer that occur after August 19, 2011. However, if the taxpayer has elected under subsection 70(31), that subsection 5907(9.1) applies to mergers or combinations in respect of all foreign affiliates of the taxpayer that occur after December 20, 2002.

(60) Subsections 5907(13) and (14) of the Regulations, as enacted by subsection (44), apply after 1992 in respect of a foreign affiliate of a taxpayer. However,

(a) if the foreign affiliate elected in accordance with paragraph 111(4)(a) of the Statutes of Canada, 1994, chapter 21, those subsections 5907(13) and (14) apply to the foreign affiliate from the foreign affiliate’s time of continuation (within the meaning assigned by that paragraph);

(b) in their application in respect of dispositions that occur on or before August 19, 2011,

(i) subject to paragraph (c), subsection 5907(13) of the Regulations, as enacted by subsection (44), is to be read as follows:

(13) For the purposes of subparagraph (ii) of paragraph 128.1(1)(d) of the Act, the prescribed amount is the amount determined by the formula

X – Z

where

X      is the amount determined by the formula

A – B – (C – D)

where

A      is the taxable surplus of the foreign affiliate of the other taxpayer referred to in that paragraph, in respect of the other taxpayer, at the end of the year referred to in that subparagraph,

B      is the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income for the year to the extent those net earnings have been included in the amount referred to in the description of A,

C      is the total of all amounts each of which is the amount by which the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year would have increased because of the gain or income of the affiliate that would have arisen if a disposition, deemed under paragraph 128.1(1)(b) of the Act, of a property by the affiliate had been an actual disposition of the property by the affiliate, and

D      is the total of all amounts each of which is the amount otherwise added in computing the affiliate’s underlying foreign tax in respect of the other taxpayer at the end of the year in respect of income or profits taxes paid to the government of a country in respect of all or a portion of a gain or an income of the affiliate referred to in the description of C, and

Z      is the amount determined by the formula

[(G – H) × (J – 1)] + K

where

G      is the amount determined by the formula

L + M

where

L      is the underlying foreign tax of the affiliate in respect of the other taxpayer at the end of the year, and

M      is the amount, if any, by which the amount determined under the description of C exceeds the amount determined under the description of D,

H      is the portion of the value of L that can reasonably be considered to relate to the affiliate’s net earnings for the year in respect of the affiliate’s foreign accrual property income,

J      is the other taxpayer’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act) for its taxation year that includes the time that is immediately before the particular time, and

K      is the amount, if any, by which

(i) the total of all amounts required by paragraph 92(1)(a) of the Act to be added at any time in a preceding taxation year in computing the adjusted cost base to the other taxpayer of the shares of the affiliate owned by the other taxpayer at the end of the year

exceeds

(ii) the total of all amounts required by paragraph 92(1)(b) of the Act to be deducted at any time in a preceding taxation year in computing the adjusted cost base to the other taxpayer of the shares of the affiliate owned by the other taxpayer at the end of the year.

(ii) the portion of subsection 5907(14) of the Regulations before paragraph (a), as enacted by subsection (44), is to be read as follows:

(14) For the purposes of the description of C in the description of X in subsection (13), the amount by which the underlying foreign tax of the affiliate in respect of the taxpayer at the end of the year would have increased, if a disposition (referred to in this subsection as the “notional actual disposition”) deemed under paragraph 128.1(1)(b) of the Act of any property by the affiliate had been an actual disposition of the property by the affiliate, is the total of all amounts each of which is the amount, if any, by which

(c) in its application in respect of dispositions that occur on or before February 27, 2004, the description of M in subsection 5907(13) of the Regulations, as enacted by subsection (44) and as required to be read by subparagraph (b)(i), is instead to be read as follows:

M      is the amount that would be determined to be the amount by which the amount determined under the description of C exceeds the amount determined under the description of D if this section were read without reference to subsection (14), and

(61) Subsection 5907(15) of the Regulations, as enacted by subsection (44), applies in respect of dispositions that occur after August 19, 2011.

86. (1) Paragraph 5908(10)(a) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (iii):

(2) Paragraph 5908(10)(b) of the Regulations, as enacted by Part 2, is amended by adding the following after subparagraph (iii):

(3) Section 5908 of the Regulations, as enacted by Part 2, is amended by adding the following after subsection (12):

(4) Subsections (1) and (2) are deemed to have come into force on August 20, 2011.

(5) Subsection (3) applies in respect of taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002. However, if the taxpayer has elected under paragraph 70(29)(b), the following rules apply in respect of taxation years of the foreign affiliate that begin after 1994 and before December 21, 2002:

(a) the reference to “5908(13)” in clauses 5907(2.9)(a)(i)(B) and (ii)(B) of the Regulations, as enacted by subsection 85(38), is to be read as a reference to “5907.1(1)”; and

(b) the Income Tax Regulations are to be read as if they contained a section that reads as follows

5907.1 (1) For the purposes of clauses 5907(2.9)(a)(i)(B) and (ii)(B), the amount determined under this subsection is, subject to subsection (2), the amount determined by the formula

A × B/C

where

A      is

(a) if clause 5907(2.9)(a)(i)(B) applies, the amount determined under clause 5907(2.9)(a)(i)(A), and

(b) if clause 5907(2.9)(a)(ii)(B) applies, the amount determined under clause 5907(2.9)(a)(ii)(A);

B      is the affiliate’s direct or indirect share of the partnership’s income or loss for the preceding taxation year; and

C      is the partnership’s income or loss for the preceding taxation year.

(2) For the purposes of subsection (1), if both the income and loss of the partnership for the preceding taxation year are nil, the descriptions of B and C in the formula in that subsection are to be applied as if the partnership had income for that year in the amount of $1,000,000.

87. (1) The description of B in paragraph 5910(1)(a) of the Regulations, as enacted by Part 2, is replaced by the following:

(2) Subsection 5910(3) of the Regulations, as enacted by Part 2, is repealed.

(3) Subsections (1) and (2) apply in respect of taxation years of a foreign affiliate of a taxpayer that end after August 19, 2011.

88. (1) The Regulations are amended by adding the following after section 5910, as enacted by Part 2:

(2) Subsections 5911(1) to (4) of the Regulations, as enacted by subsection (1), apply in respect of liquidations and dissolutions of foreign affiliates of a taxpayer that begin after February 27, 2004. However, any listed election referred to in that subsection 5911(1) that would otherwise be required to be filed with the Minister of National Revenue before the day that is 120 days after the day on which this Act receives royal assent is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister within 365 days after the day on which this Act receives royal assent.

(3) Subsection 5911(5) of the Regulations, as enacted by subsection (1), applies in respect of determinations in respect of which subsection 70(22) applies. However, any election referred to in that subsection 5911(5) that would otherwise be required to be filed with the Minister of National Revenue before the day that is 120 days after the day on which this Act receives royal assent is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister within 365 days after the day on which this Act receives royal assent.

(4) Subsection 5911(6) of the Regulations, as enacted by subsection (1), applies in respect of distributions made after August 19, 2011. However, any election referred to in that subsection 5911(6) that would otherwise be required to be filed with the Minister of National Revenue before the day that is 120 days after the day on which this Act receives royal assent is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister within 365 days after the day on which this Act receives royal assent.