Income Tax Regulations — 5904
5904 (1) For the purpose of subparagraph (b)(ii) of the definition participating percentage in subsection 95(1) of the Act, the participating percentage of a particular share owned by a taxpayer of the capital stock of a corporation in respect of any foreign affiliate of the taxpayer that was, at the end of its taxation year, a controlled foreign affiliate of the taxpayer is prescribed to be the percentage that would be the taxpayer’s equity percentage in the affiliate at that time on the assumption that (a) the taxpayer owned no shares other than the particular share; (b) the direct equity percentage of a person in any foreign affiliate of the taxpayer, for which the total of the distribution entitlements of all the shares of all classes of the capital stock of the affiliate was greater than nil, was determined by the following rules and not by the rules contained in the definition direct equity percentage in subsection 95(4) of the Act: (i) for each class of the capital stock of the affiliate, determine that amount that is the proportion of the distribution entitlement of all the shares of that class that the number of shares of that class owned by that person is of all the issued shares of that class, and (ii) determine the proportion that (A) the aggregate of the amounts determined under subparagraph (i) for each class of the capital stock of the affiliate is of (B) the aggregate of the distribution entitlements of all the issued shares of all classes of the capital stock of the affiliate and the proportion determined under subparagraph (ii) when expressed as a percentage is that person’s direct equity percentage in the affiliate; and (c) the direct equity percentage of a person in any foreign affiliate of the taxpayer, for which the total of the distribution entitlements of all the shares of all classes of the capital stock of the affiliate would not, in the absence of this paragraph, be greater than nil, was determined on the assumption that the amount determined under subparagraph (2)(b)(i) were the greater of (i) the amount of the affiliate’s retained earnings, if any, determined at the end of the taxation year under accounting principles that are relevant to the affiliate for the taxation year, and (ii) the amount determined by the formula A × B where A is the amount of the affiliate’s total assets determined at the end of the taxation year under accounting principles that are relevant to the affiliate for the taxation year, and B is 25%. (2) For the purposês of this section, the distribution entitlement of all the shares of a class of the capital stock of a foreign affiliate of the taxpayer at the end of its taxation year is the aggregate of (a) the distributions made during the year by the affiliate to holders of shares of that class; and (b) the amount that the affiliate might reasonably be expected to distribute to holders of shares of that class immediately after the end of the year if at that time it had distributed to its shareholders an amount equal to the aggregate of (i) the amount, if any, by which the net surplus of the affiliate in respect of the taxpayer at the end of the year, computed as though any adjustments resulting from the provisions of sections 5902 and 5905 and subsections 5907(2.1) and (2.2) and any references thereto during the year were ignored, exceeds the net surplus of the affiliate in respect of the taxpayer at the end of its immediately preceding taxation year, and (ii) the amount that the affiliate would receive if at that time each controlled foreign affiliate of the taxpayer in which the affiliate had an equity percentage had distributed to its shareholders an amount equal to the aggregate of (A) the amount that would be determined under subparagraph (i) for the controlled foreign affiliate if the controlled foreign affiliate were the foreign affiliate referred to in subparagraph (i), for each of the taxation years of the controlled foreign affiliate ending in the taxation year of th