Income Tax Regulations — 5907
 such portion of the amount as may reasonably be regarded as relating to an amount deducted from the taxable surplus or included in the taxable deficit, as the case may be, of the loss affiliate shall at the end of the year be deducted from the taxable surplus or added to the taxable deficit, as the case may be, of the taxpaying affiliate and be added to the underlying foreign tax of the taxpaying affiliate, and (ii) in respect of the loss affiliate, the amount shall be deemed to be a refund to the loss affiliate of income or profits tax in respect of the loss for the taxation year of the loss. (1.21) Subsection (1.22) applies if (a) a foreign affiliate of the taxpayer (in this subsection and subsection (1.22) referred to as the “shareholder affiliate”) has an equity percentage in another foreign affiliate (in this subsection and subsection (1.22) referred to as the “transparent affiliate”); and (b) under the income tax laws of the country in which the shareholder affiliate is resident, the shareholder affiliate, and not the transparent affiliate, is liable for any tax payable to, or entitled to any refund from, a government of that country for that year in respect of the income or profits, or loss, as the case may be, for the year of the transparent affiliate. (1.22) If this subsection applies, for the purpose of applying subsection (1.2), any loss of the transparent affiliate, to the extent that the loss is deducted in computing the income, profits or loss of the shareholder affiliate under an income tax law referred to in paragraph (1.21)(b), (a) is deemed to be a loss of the shareholder affiliate; and (b) is deemed to (i) reduce the exempt surplus, or increase the exempt deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the exempt surplus or increases the exempt deficit of the transparent affiliate, (ii) reduce the hybrid surplus or increase the hybrid deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the hybrid surplus or increases the hybrid deficit of the transparent affiliate, and (iii) reduce the taxable surplus or increase the taxable deficit, as the case may be, of the shareholder affiliate to the extent that it reduces the taxable surplus or increases the taxable deficit of the transparent affiliate. (1.3) For the purpose of paragraph (b) of the definition foreign accrual tax in subsection 95(1) of the Act and subject to subsection (1.4), (a) if under the income tax laws of the country in which the particular affiliate or a shareholder affiliate of the particular affiliate, as the case may be, referred to in that paragraph is resident, the particular affiliate, or shareholder affiliate, and one or more other corporations, each of which is resident in that country, determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis, then any amount paid by the particular affiliate, or shareholder affiliate, to any of those other corporations to the extent that the amount paid may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate, or shareholder affiliate, in respect of a particular amount that is included under subsection 91(1) of the Act in computing the taxpayer’s income for a taxation year of the taxpayer in respect of the particular affiliate, if the tax liability of the particular affiliate, or shareholder affiliate, and those other corporations had not been determined on a consolidated or combined basis, is prescribed to be foreign accrual tax applicable to the particular amount; and (b) if, under the income tax laws of the country in which the particular affiliate or a shareholder affiliate of the particular affiliate, as the case may be, referred to in that paragraph is resident, the particular affiliate, or shareholder affiliate, deducts, in computing its income or p