Income Tax Regulations — 5907
plus or increases the exempt deficit of the transparent affiliate, such loss is deemed to reduce the exempt surplus or increase the exempt deficit, as the case may be, of the particular affiliate, (iii) to the extent that such loss reduces the hybrid surplus or increases the hybrid deficit of the transparent affiliate, such loss is deemed to reduce the hybrid surplus or increase the hybrid deficit, as the case may be, of the particular affiliate, and (iv) to the extent that such loss reduces the taxable surplus or increases the taxable deficit of the transparent affiliate, such loss is deemed to reduce the taxable surplus or increase the taxable deficit, as the case may be, of the particular affiliate. (1.2) For the purposes of this Part, where, pursuant to the income tax law of a country other than Canada, a corporation resident in that country that is a foreign affiliate of a corporation resident in Canada (in this subsection referred to as the “taxpaying affiliate”) deducts, in computing its income or profits tax payable for a taxation year to a government of that country, a loss of another corporation resident in that country that is a foreign affiliate of the corporation resident in Canada (in this subsection referred to as the “loss affiliate”), the following rules apply: (a) any such income or profits tax paid by the taxpaying affiliate for the year shall be deemed not to have been paid; (b) any such income or profits tax that would have been payable by the taxpaying affiliate for the year if the taxpaying affiliate had not been allowed to deduct such loss shall be deemed to have been paid for the year; (c) to the extent that the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year is reduced by virtue of such loss, the amount of such reduction shall at the end of the year, (i) where such loss reduces the exempt surplus or increases the exempt deficit, as the case may be, of the loss affiliate, be added to the exempt surplus or deducted from the exempt deficit, as the case may be, of the taxpaying affiliate, (i.1) where such loss reduces the hybrid surplus or increases the hybrid deficit, as the case may be, of the loss affiliate, (A) be added to the hybrid surplus or deducted from the hybrid deficit, as the case may be, of the taxpaying affiliate, and (B) be deducted from the hybrid underlying tax of the taxpaying affiliate, and (ii) where such loss reduces the taxable surplus or increases the taxable deficit, as the case may be, of the loss affiliate, (A) be added to the taxable surplus or deducted from the taxable deficit, as the case may be, of the taxpaying affiliate, and (B) be deducted from the underlying foreign tax of the taxpaying affiliate; and (d) where an amount is paid by the taxpaying affiliate to the loss affiliate in respect of the reduction, by virtue of such loss, of the income or profits tax that would otherwise have been payable by the taxpaying affiliate for the year, (i) in respect of the taxpaying affiliate, (A) such portion of the amount as may reasonably be regarded as relating to an amount deducted from the exempt surplus or included in the exempt deficit, as the case may be, of the loss affiliate shall at the end of the year be deducted from the exempt surplus or added to the exempt deficit, as the case may be, of the taxpaying affiliate, (A.1) such portion of the amount as may reasonably be regarded as relating to an amount deducted from the hybrid surplus or included in the hybrid deficit, as the case may be, of the loss affiliate is, at the end of the year, to be deducted from the hybrid surplus or added to the hybrid deficit, as the case may be, of the taxpaying affiliate and added to the hybrid underlying tax of the taxpaying affiliate, and (B) 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