International Tax Planning: The Preacquisition Surplus Election: More Than Meets the Eye?

Regulation 5901(2)(b) permits a corporation resident in Canada (CRIC) to make an election in respect of a dividend paid by a foreign affiliate of the CRIC such that the dividend will be treated as a reduction to the adjusted cost base of the foreign affiliate shares on which it is paid, rather than as a distribution from the foreign affiliate's surplus pools. Making this "preacquisition surplus election" is often perceived as a straightforward, and administratively simple, way for the CRIC to ensure that the dividend does not result in the unwanted, and potentially adverse, distribution of the foreign affiliate's surplus pools. However, as this article points out, it is important that a CRIC undertake a detailed analysis before deciding to make the election, in order to avoid potential exposure to unintended consequences. This article provides an overview of the legislative history of the election and its underlying policy rationale, and describes the limitations of and restrictions on its use. The authors present some conceptual guidelines (along with examples of their application) for identifying certain circumstances in which the making of the election may be particularly favourable or unfavourable. They also compare and contrast this election with the "qualifying return of capital" (QROC) election under subsection 90(3), which may be available in some circumstances as an alternative mechanism for achieving a similar result.

Credibility, Reputation and De-Risking in Global Banking: Evidence from a Theoretical Model

This paper investigates the de-risking phenomenon from the perspective of an international bank’s decision to de-risk in a foreign market, where there is asymmetric information and costly monitoring. We consider three adverse shocks to a foreign affiliate’s (i) perceived credibility, (ii) costs of monitoring, and (iii) reputation, as reflected in a loss of franchise value. We show that the headquarters’ incentives to reduce international exposures are prompted by increasing funding and monitoring costs and by falling franchise values. Distortions arise because adverse credibility shocks make funding rates less responsive to actual risk choices, and impairments in the bank’s reputation negatively affect franchise values. All else equal, this reduces the bank’s incentives to retain and monitor the foreign affiliate, and risks increase. The risk effects are most pronounced in the case of credibility shocks, and incentives to reduce international exposures are strongest when reputational risks affect headquarters.

International Tax Planning: The Foreign Affiliate Surplus Reclassification Rule

Bill C-48, the Technical Tax Amendments Act, 2012, introduced, among other things, several significant changes to the foreign affiliate surplus rules, including the adoption of the surplus reclassification rule in regulation 5907(2.02). The surplus reclassification rule is a broadly worded specific anti-avoidance rule that can apply to reclassify a foreign affiliate's exempt earnings (and exempt surplus) into taxable earnings (and taxable surplus) when the exempt earnings arise from certain tax-motivated dispositions of property. On the basis of a textual, contextual, and purposive interpretation of this provision, the author maintains that the rule should apply only in circumstances involving foreign affiliate surplus stripping—that is, tax-free transactions designed to convert low-taxed taxable surplus into exempt surplus that can be distributed or otherwise relied on to achieve Canadian tax savings.