{"id":1144,"date":"2014-06-02T16:25:45","date_gmt":"2014-06-02T16:25:45","guid":{"rendered":"https:\/\/thor.ca\/\/blog\/?p=1144"},"modified":"2014-06-02T17:07:37","modified_gmt":"2014-06-02T17:07:37","slug":"cra-issues-guidance-on-u-s-338h10-election-in-foreign-affiliate-context","status":"publish","type":"post","link":"https:\/\/www.thor.ca\/blog\/2014\/06\/cra-issues-guidance-on-u-s-338h10-election-in-foreign-affiliate-context\/","title":{"rendered":"CRA issues guidance on U.S. 338(h)(10) election in foreign affiliate context"},"content":{"rendered":"<p>In <a href=\"http:\/\/thor.ca\/blog\/wp-content\/uploads\/2014\/06\/2013-0499141I7.pdf\">2013-0499141I7<\/a>, a Canadian company (Canco) acquired a U.S. group through Canco\u2019s foreign affiliate in the U.S. (FA).\u00a0 The U.S. seller and FA filed a joint election under s. 338(h)(10) of the U.S. IRC; this had the effect of deeming a sale and reacquisition the U.S. group\u2019s assets at FMV immediately <em>prior to<\/em> the sale \u2013 stepping up their U.S. tax basis.\u00a0 The U.S. group subsequently sold some of these assets to a third party and Canco thereafter redeemed some of its shares held by a private Canadian company (Private Co).\u00a0 On the share redemption, Private Co received a deemed dividend that was subject to re-characterization as a capital gain under s. 55(2)\u00a0 On these facts, the CRA confirmed its views as follows:<\/p>\n<ul>\n<ol>\n<li><span style=\"text-decoration: underline\">Exempt Surplus Adjustments<\/span>:\u00a0 The U.S. group\u2019s exempt surplus in respect of Canco had to be adjusted by (a) ignoring (adding back) any depreciation and amortization arising directly from the increased tax basis under the s. 338(h)(10) election, and (b) ignoring the stepped-up tax basis under the s. 338(h)(10) election in computing any <em>income gain<\/em> on the intangibles and any recapture on the tangibles (Reg. 5907(2)(b) and (f)).\u00a0 No adjustment could be made, however, for the increased tax basis under the s. 338(h)(10) election when computing any <em>capital gain<\/em> on the tangibles (s. 95(2)(f)(i), s. 95(2)(f.1), and Reg. 5907(5)).<\/li>\n<li><span style=\"text-decoration: underline\">Safe Income under s. 55(2)<\/span>:\u00a0 Although the adjustments in 1 above would increase Canco\u2019s underlying \u201csafe income\u201d from Private Co\u2019s perspective (computed under former s. 55(5)(d)), in the CRA\u2019s view <em>no portion<\/em> of the accrued gain on Private Co\u2019s shares of Canco \u201ccould reasonably be considered to be attributable to\u201d this safe income for purposes of s. 55(2).\u00a0 Rather, the accrued gain on Private Co\u2019s shares of Canco could more reasonably be considered to be attributable to FA\u2019s <em>purchase cost<\/em> on its shares of the top-tier U.S. company; this view was also consistent with the object and purpose of s. 55(2).<\/li>\n<\/ol>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>In <a href=\"http:\/\/thor.ca\/blog\/wp-content\/uploads\/2014\/06\/2013-0499141I7.pdf\">2013-0499141I7<\/a>, a Canadian company (Canco) acquired a U.S. group through Canco\u2019s foreign affiliate in the U.S. (FA).\u00a0 The U.S. seller and FA filed a joint election under s. 338(h)(10) of the U.S. IRC; this had the effect of&hellip;<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-1144","post","type-post","status-publish","format-standard","hentry","category-corporate-tax"],"_links":{"self":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/1144","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/comments?post=1144"}],"version-history":[{"count":0,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/1144\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/media?parent=1144"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/categories?post=1144"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/tags?post=1144"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}