Surplus Maintenance Details Revealed

At the 2022 IFA CRA round table, the CRA provided for the first time a list of the documentation required for surplus computations. It also provided an extensive list of situations where an up-to-date surplus computation is required. (Unsurprisingly, a subsection 113(1) deduction with respect to a dividend received from a foreign affiliate is not the only situation for which the CRA now requires surplus computations.) Although these CRA statements highlight the importance of maintaining surplus computation on a continuous and timely basis, taxpayers may find it difficult, practically speaking, to comply with the requirements.

Three years ago, at the 2019 IFA conference (published as CRA document no. 2019-0798761C6, May 15, 2019), the CRA commented that if complete surplus computations were not provided to the CRA upon request, CRA practice would generally be to deny the deduction claimed under subsection 113(1). The tax community took heed of the CRA’s statement, and maintaining up-to-date surplus computations has become a prerequisite for a subsection 113(1) deduction.

With its 2022 list of required documentation, the CRA has taken its requirements in this regard a step (or several steps) further. In its 2022 round table comments, the CRA noted that the appropriate documentation depends on specific fact patterns and circumstances but that the documentation now required may include

  • the foreign affiliate’s non-consolidated financial statements;
  • the foreign affiliate’s trial balance;
  • the foreign affiliate’s complete minute books;
  • the foreign affiliate’s income tax returns and all relevant supporting schedules for the income tax returns;
  • supporting documentation for income tax paid by the foreign affiliate; and
  • relevant supporting documentation
    1. describing the business(es) of the foreign affiliate,
    2. related to the nature of the income earned by the foreign affiliate,
    3. related to transactions involving the foreign affiliate, and
    4. related to dividends paid or received by the foreign affiliate.


This new guidance suggests that position memos concerning the surplus computations of a foreign affiliate will likely be needed (1) to document the fact patterns and transactions of the foreign affiliate, and (2) to identify the documentation available to provide information about the key transactions.

In addition to the list of required documentation, the CRA provided an extensive but non-exhaustive list of contexts in which an up-to-date surplus computation is required. First on the list are provisions relating to surplus that are commonly used by taxpayers to claim deductions in computing Canadian income, such as subsection 113(1) and (for an upstream loan) subsection 90(9).

Second, the list enumerates factors that can indirectly affect an adjustment in computing the Canadian income of a taxpayer, such as

  • a subsection 93(1) election, which can convert into a dividend a capital gain arising from the taxpayer’s disposition of a foreign affiliate;
  • the tax-free surplus balance of a foreign affiliate that is included in the safe income of the taxpayer under paragraph 55(5)(d);
  • the “specified amount” to be included in income for an upstream loan under subsection 90(6) when the foreign affiliate has issued more than one class of shares and there is more than one shareholder;
  • the FAPI and participating percentage with respect to a foreign affiliate when the foreign affiliate has issued more than one class of shares and there is more than one shareholder; and
  • transactions that may affect FAPI and capital gain or losses from the disposition of property by the foreign affiliate—for example, a transaction involving a foreign affiliate that could trigger the application of regulation 5905; a change in the business of a foreign affiliate that could trigger the application of the fresh-start rules in paragraphs 95(2)(k) and 95(2)(k.2) and regulation 5907(2.9); and a deemed subsection 93(1) election to convert a capital gain into a dividend.


The CRA also stated that if documentation is not available to adequately support the surplus computation at the time the surplus is utilized, any deduction claimed on the basis of surplus account balances will be denied, and there may be other adjustments.

Even for the most diligent of taxpayers, maintaining surplus computations can be a challenge. The time and resources, not to mention the advanced technical skills, that are required to perform surplus computations are significant. Although the CRA has indicated that the list of documents that it will ask for will depend on the facts, there is concern that the new requirements may nevertheless, in certain circumstances, pose an additional administrative burden that is impractical and disproportionate to the tax at stake.

For example, for complex cross-border reorganizations involving multiple parties and their advisers, it is not unusual for legal documents and financial information not to be finalized in time for the surplus computation to be completed by the filing-due date of the corporate tax return (that is, six months after the taxation year-end). Taxpayers sometimes prepare tax returns on the basis of their best estimate of surplus account balances, especially when no immediate or material Canadian tax consequences are involved. With the CRA’s newly stringent policy on the supporting documentation required for surplus computations, taxpayers might consider waiting for full and final information to become available and then amending prior returns to claim a deduction.

It is also interesting that the CRA has identified complete minute books of the taxpayer’s foreign affiliate as among the documentary evidence that may be required. In practice, only specific legal documents—evidence, for example, of a dividend or a transaction that could affect the surplus account of the affiliate—are retained to verify surplus. Most of the documents in a minute book that are related to general corporate maintenance are not relevant to surplus. The Canadian taxpayer in respect of which surplus is computed may also face practical difficulties in obtaining the foreign affiliate’s complete minute books, especially when the taxpayer does not have control of the foreign entity.

Coincidentally, at the 2022 IFA CRA round table, the CRA, when addressing another aspect of the exempt surplus of a foreign affiliate, reiterated that in order to accumulate exempt earnings under paragraph (d) of the definition of “exempt earnings” in regulation 5907(1), the foreign affiliate must be a resident in a designated treaty country under both regulation 5907(11.2) and Canadian common-law principles. The CRA also commented that in order to show evidence of the residence of a foreign affiliate under common-law principles, the Canadian taxpayer must keep detailed and complete records verifying the location where the central management and control of the foreign affiliate is exercised. The records should provide information regarding the foreign affiliate’s course of business and trading, including, but not limited to, the location of board meetings and the tax residence of the members of the board. The CRA’s comment further demonstrates the importance of maintaining appropriate documentation for surplus computations.

Silvia Wang and Clara Pham
RSM Canada LLP, Toronto

International Tax Highlights

Volume 1, Number 2, August  2022

©2022, Canadian Tax Foundation and IFA Canada

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