CRA reverses two prior positions in foreign affiliate context

The CRA recently reversed two prior positions in the foreign affiliate context: one on the redemption of preferred shares in a controlled foreign affiliate, the other on the recharacterization rule in s. 95(2)(a)(ii)(D).

1. In 2014-0528361E5, the CRA reversed its prior statement in 2012-0439741I7. The CRA (now) agrees that a premium realized by a Canadian parent company (Canco) on the redemption of mandatory redeemable preference shares held in its controlled foreign affiliate results in proceeds of disposition, and not a dividend. Canco may change this result by filing an election under s. 93(1), so as to convert a capital gain into a deemed dividend. Such election can be useful where the deemed dividend would be considered paid from underlying exempt surplus, which is essentially tax free to Canco (s. 113(1)(a)).
2. In 2014-0519801I7, the CRA reversed – without explanation – its prior position in 2013-0496841I7. In the latter document, the CRA concluded that s. 95(2)(a)(ii)(D) did not apply to a complex restructuring so as to convert interest income into active business income (in respect of a purchase note). Although not clear from 2014-0519801I7, the CRA may have reversed this prior position based on the words “directly or indirectly” in s. 95(2)(a)(ii).