Bumping Foreign Affiliate Shares Under The February 27, 2004 Proposals

The February 27, 2004 foreign affiliate proposals present a number of interesting issues for an acquiror of a Canadian target company that owns foreign affiliate shares, particularly where the acquisition is structured to preserve the availability of the tax cost "bump" under paragraphs 88(1)(c) and (d) of the Income Tax Act (Canada)¹. This article first briefly reviews the limitation in proposed paragraph 88(1)(d.4) (including the modified proposal) that would erode the bump room in respect of foreign affiliate shares where prior dividends have been deductible under section 113. It then examines the surplus and deficit reset rules in proposed Regulations 5905(5.1) and (5.2) that will be relevant where the acquiror applies the tax cost bump to foreign affiliate shares. Finally, the article discusses the possibility of achieving a tax cost bump of foreign affiliate shares under the paragraph 111(4)(e) election without losing historical underlying surplus balances.