Income Tax Regulations — 5905
ime, and B is the percentage that would, if the deficit affiliate were resident in Canada, be the deficit affiliate’s surplus entitlement percentage in respect of the acquired affiliate immediately before the acquisition time, and (ii) the lesser of (A) the acquired affiliate’s tax-free surplus balance in respect of the corporation immediately before the adjustment time, and (B) either (I) if there is more than one acquired affiliate, the amount designated by the corporation, in its return of income for the taxation year in which the taxation year of the acquired affiliate that includes the acquisition time ends, in respect of the acquired affiliate, or (II) in any other case, the amount determined under clause (A); (b) at the time that is immediately after the acquisition time, under subparagraph (vi.1) of the description of A in the definition exempt surplus in subsection 5907(1) in computing the deficit affiliate’s exempt deficit in respect of the corporation, the total of all amounts each of which is the amount determined in respect of an acquired affiliate by the formula C × D where C is the amount determined under paragraph (a) in respect of the acquired affiliate, and D is the percentage that would, if the deficit affiliate were resident in Canada, be the deficit affiliate’s surplus entitlement percentage immediately before the acquisition time in respect of the acquired affiliate; and (c) at the time that is immediately after the acquisition time, under subparagraph (vi.1) of the description of A in the definition exempt surplus in subsection 5907(1) in computing the exempt surplus or exempt deficit of any other foreign affiliate (referred to in this paragraph and paragraph (7.6)(b) as a “subordinate affiliate”) of the corporation, in respect of the corporation, that has immediately before the acquisition time a direct equity percentage (within the meaning assigned by subsection 95(4) of the Act) in the acquired affiliate and in which, immediately before the acquisition time, the deficit affiliate does not have an equity percentage (within the meaning assigned by subsection 95(4) of the Act), the amount determined by the formula E × F where E is the amount determined under paragraph (a) in respect of the acquired affiliate, and F is the percentage that would, if the subordinate affiliate were resident in Canada, be the subordinate affiliate’s surplus entitlement percentage immediately before the acquisition time in respect of the acquired affiliate if the subordinate affiliate owned no shares of the capital stock of any corporation other than its shares of the capital stock of the acquired affiliate. (7.3) Subsection (7.4) applies if (a) the lesser of (i) the deficit affiliate’s exempt deficit in respect of the corporation immediately before the acquisition time, and (ii) the total of all amounts each of which is the amount, if any, that is the product obtained by multiplying (A) the tax-free surplus balance immediately before the acquisition time in respect of the corporation of an acquired affiliate, and (B) the surplus entitlement percentage of the corporation in respect of that acquired affiliate immediately before the acquisition time exceeds (b) the total of all amounts each of which is the amount, if any, that is the product obtained by multiplying (i) the amount, if any, actually designated under subclause (7.2)(a)(ii)(B)(I) in respect of an acquired affiliate, and (ii) the surplus entitlement percentage of the corporation in respect of that acquired affiliate immediately before the acquisition time. (7.4) If this subsection applies, the amount designated by the corporation in respect of a particular acquired affiliate is deemed, for the purposes of subclause (7.2)(a)(ii)(B)(I), (a) to be the amount determined by the Minister in respect of the particular acquired affiliate; and (b) not to be the amount, if any, actually designated under subclause (7.2)(a)(ii)(B)(I). (7.5) Subsection (7.6) applies if (a) subsect