Under Section 113(1) of the Income Tax Act (Canada), a Canadian resident corporation can deduct certain amounts from its income when it receives a dividend from a foreign affiliate. This deduction reduces the corporation’s taxable income for the year.
Types of Deductions:
1. Exempt Surplus:
Dividends paid from the foreign affiliate’s exempt surplus (as defined by regulation) can be fully deducted from the corporation’s income.
2. Hybrid Surplus:
Half of the dividend paid from the affiliate’s hybrid surplus can be deducted.
An additional deduction may be allowed based on:
Foreign tax on the hybrid surplus dividend, adjusted by the corporation’s tax factor.
Non-business-income tax paid by the corporation on the hybrid surplus dividend, also adjusted by the tax factor.
The total deduction is the lesser of these calculated amounts.
3. Taxable Surplus:
The deduction for dividends paid from taxable surplus is based on:
The portion of foreign tax paid on the dividend (adjusted by the corporation’s tax factor), or
The amount of the dividend itself, whichever is lower.
4. Non-business-income Tax:
The deduction is based on either the non-business-income tax paid on the dividend (adjusted by the tax factor) or the portion of the dividend exceeding other deductions, whichever is lower.
5. Pre-acquisition Surplus:
Dividends paid from the affiliate’s pre-acquisition surplus are also deductible.
Additional Deduction (for Shares Held Since 1975):
If the corporation has owned shares in the foreign affiliate since 1975, it may qualify for an extra deduction. The amount is limited by the adjusted cost base of the share and any dividends received over the years.
Example: Deduction for Dividends Received from a Foreign Affiliate
Scenario:
Let’s say Maple Corp, a Canadian resident corporation, owns shares in a foreign affiliate called Global Ltd. In 2023, Maple Corp received three types of dividends from Global Ltd:
Exempt Surplus Dividend: $50,000
Hybrid Surplus Dividend: $20,000
Taxable Surplus Dividend: $30,000
Maple Corp has the following information:
Foreign tax applicable to the hybrid surplus dividend: $2,000
Non-business-income tax paid on the hybrid surplus dividend: $1,000
Maple Corp's relevant tax factor: 1.5
Step-by-Step Deduction Calculation:
1. Exempt Surplus Dividend Deduction:
Since dividends paid from exempt surplus are fully deductible, Maple Corp can deduct the entire $50,000 from its taxable income.
2. Hybrid Surplus Dividend Deduction:
Half of the hybrid surplus dividend can be deducted:
$20,000 ÷ 2 = $10,000
An additional deduction based on foreign tax and non-business-income tax is calculated:
Foreign tax deduction: $2,000 × (1.5 - 0.5) = $2,000
Non-business-income tax deduction: $1,000 × 1.5 = $1,500
The additional deduction is the lesser of $2,000 and $10,000. Therefore, the total deduction for the hybrid surplus dividend = $10,000.
3.Taxable Surplus Dividend Deduction:
The deduction is the lesser of:
The portion of foreign tax paid on the dividend: $30,000 × (1.5 - 1) = $15,000
The dividend itself: $30,000
Therefore, the deduction for the taxable surplus dividend = $15,000.
Total Deduction for Maple Corp:
Exempt surplus: $50,000
Hybrid surplus: $10,000
Taxable surplus: $15,000
Deduction = $50,000 + $10,000 + $15,000 = $75,000
For more information, please visit the Canada Revenue Agency:
Canada Revenue Agency
