Income Tax Regulations — 5902
5902 (1) If at any time a dividend (such time and each such dividend, respectively, referred to in this subsection and subsection (2) as the “dividend time” and an “elected dividend”) is, by virtue of an election made under subsection 93(1) of the Act by a corporation in respect of a disposition, deemed to have been received on a share (each such share referred to in this subsection as an “elected share”) of a class of the capital stock of a particular foreign affiliate of the corporation, the following rules apply: (a) for the purposes of subsection 5900(1), in applying the provisions of subsection 5901(1), (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 (A) each other foreign affiliate of the corporation in which the affiliate had an equity percentage (within the meaning assigned by subsection 95(4) of the Act) at the dividend time had, immediately before the time that is immediately before the dividend time, paid a dividend equal to its net surplus in respect of the corporation, determined immediately before the time the dividend was paid, and (B) any dividend referred to in clause (A) that any other foreign affiliate would have received had been received by it immediately before any such dividend that it would have paid, and (ii) the particular affiliate is deemed to have paid a whole dividend at the dividend time on the shares of that class of its capital stock in an amount determined by the formula A × B where A is the total of all amounts each of which is the amount of an elected dividend, and B is the greater of (A) one, and (B) the quotient determined by the formula C/D where C is the amount of the particular affiliate’s net surplus determined under subparagraph (a)(i), and D is the greater of (I) one unit of the currency in which the amount determined for C is expressed, and (II) the amount that would have been received on the elected shares if the particular affiliate had at the dividend time paid dividends, on all shares of its capital stock, the total of which was equal to the amount of its net surplus referred to in subparagraph (a)(i); and (b) subject to paragraph 5905(5)(c), there is to be included, at the dividend time, (i) under subparagraph (v) of the description of B in the definition exempt surplus in subsection 5907(1) in computing the particular affiliate’s exempt surplus or exempt deficit, as the case may be, in respect of the corporation an amount equal to the product obtained when the specified adjustment factor in respect of the disposition is multiplied by the total of all amounts each of which is the portion of any elected dividend that is prescribed by paragraph 5900(1)(a) to have been paid out of the exempt surplus of the particular affiliate, (i.1) under subparagraph (vi) of the description of B in the definition hybrid surplus in subsection 5907(1) in computing the particular affiliate’s hybrid surplus or hybrid deficit, as the case may be, in respect of the corporation an amount equal to the product obtained when the specified adjustment factor in respect of the disposition is multiplied by the total of all amounts each of which is the portion of any elected dividend that is prescribed by paragraph 5900(1)(a.1) to have been paid out of the hybrid surplus of the particular affiliate, (i.2) under subparagraph (iii) of the description of B in the definition hybrid underlying tax in subsection 5907(1) in computing the particular affiliate’s hybrid underlying tax in respect of the corporation an amount equal to the product obtained when the specified adjustment factor in respect of the disposition is multiplied by the total of all amounts each of which is the amount prescribed by paragraph 5900(1