Income Tax Regulations — 5905
e of the subsidiary, the amount determined by the formula A × B where A is the affiliate’s tax-free surplus balance, in respect of the subsidiary, determined at the time at which the parent last acquired control of the subsidiary, and B is the percentage that would be the subsidiary’s surplus entitlement percentage, determined at that time, in respect of the affiliate if at that time the subsidiary had owned no shares of the affiliate’s capital stock other than the share; (b) if the property described in that subparagraph is an interest in a partnership, the amount determined by subsection 5908(7); and (c) in any other case, nil. (5.5) For the purposes of subsections (5.2), (5.4), (7.2) and (7.3), the tax-free surplus balance of a foreign affiliate of a corporation resident in Canada, in respect of the corporation, at any time, is the total of (a) the amount, if any, by which the affiliate’s exempt surplus in respect of the corporation at that time exceeds the total of (i) the affiliate’s hybrid deficit, if any, in respect of the corporation at that time, and (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 [A × (B – 0.5)] + (C × 0.5) where A is the affiliate’s hybrid underlying tax in respect of the corporation at that time, B is the corporation’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act) for the corporation’s taxation year that includes that time, and C is the affiliate’s hybrid surplus in respect of the corporation at that time; and (b) the lesser of (i) the amount, if any, determined by the formula A × B where A is the affiliate’s underlying foreign tax in respect of the corporation at that time, and B is the amount by which the corporation’s relevant tax factor (within the meaning assigned by subsection 95(1) of the Act), for the corporation’s taxation year that includes that time, exceeds one, and (ii) the amount, if any, by which the affiliate’s taxable surplus in respect of the corporation at that time exceeds (A) if the affiliate has an exempt deficit and a hybrid deficit, in respect of the corporation at that time, the total of the exempt deficit and the hybrid deficit, (B) if the affiliate has an exempt deficit and no hybrid deficit, in respect of the corporation at that time, the amount, if any, by which the exempt deficit exceeds the affiliate’s hybrid surplus in respect of the corporation at that time, and (C) if the affiliate has a hybrid deficit and no exempt deficit, in respect of the corporation at that time, the amount, if any, by which the hybrid deficit exceeds the affiliate’s exempt surplus in respect of the corporation at that time. (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 (a) if the affiliate has an exempt deficit and a taxable deficit, in respect of the corporation at that time, the total of the exempt deficit and the taxable deficit; (b) if the affiliate has an exempt deficit and no taxable deficit, in respect of the corporat