Foreign Affiliates Update Bump Limitation & Surplus Grind Proposals

Transcription

1 CANADIAN PETROLEUM TAX JOURNAL Vol. 23, Foreign Affiliates Update Bump Limitation & Surplus Grind Proposals Jennifer Hanna, LL.B Couzin Taylor, LLP 1 * This article is current to August 27, This paper reviews the proposed amendments to the Income Tax Act 2 relating to the 88(1)(d) bump for foreign affiliate shares and the surplus adjustment rules that apply after an acquisition of control. These rules have been the subject of a series of proposed amendments since 2004, the most recent of which were released in the December 18, 2009 package of proposed legislative amendments, with some further tweaks in the August 2010 package. This paper discusses the various iterations of the proposed changes. The bump calculation, the surplus adjustment rules, and the 93(1) election commonly intersect in a situation where control of a adian corporation has been acquired by a foreign buyer. For business and tax efficiency, it is often desirable that the foreign affiliates of the adian target be transferred out from under ada, as illustrated by Diagram 1. The adian Petroleum Tax Society

2 adian Petroleum Tax Journal Vol. 23, Diagram 1. Before Foreign Parent Co After Foreign Parent Co Acquisition Co Amalco Co FA 1 Target Co Opco FA 2 Opco FA 1 FA 2 In order to move a foreign affiliate out from under ada, the shares of the affiliate have to be sold or otherwise distributed by the adian company. However, a simple sale or distribution will result in a disposition for fair market value proceeds and therefore could result in a taxable capital gain for adian tax purposes 3. The desired result can often be achieved without creating a taxable capital gain through making either a paragraph 88(1)(d) bump designation, to increase the adjusted cost base ( ACB ) of the foreign affiliate shares, or a subsection 93(1) election, to treat part of the proceeds of disposition as a dividend paid by the foreign affiliate out of its surplus pools. In some cases, both the paragraph 88(1)(d) designation and the subsection 93(1) election will be required to optimize the tax result. Bump Overview Although this article focuses specifically on the proposed changes to the foreign affiliate bump limitation rules and does not discuss the broader bump rules in detail, a high-level overview may be useful to provide context for the proposed changes. Subsection 88(1) generally provides rules applicable on a windup of a corporation into its parent. In particular, the rules in subsection 88(1) apply where there has been a winding-up of a taxable adian corporation (the subsidiary ) into its parent corporation. By reason of paragraph 87(11)(b), the rules in subsection 88(1) also The adian Petroleum Tax Society 2

3 adian Petroleum Tax Journal Vol. 23, apply to determine the cost of property acquired by a corporation that is formed upon the vertical amalgamation of a parent corporation and one or more of its wholly-owned subsidiary corporations. Under paragraph 88(1)(c), the cost of certain capital property that is acquired by a parent corporation upon the winding-up of its subsidiary, or by an amalgamated corporation from the predecessor subsidiary corporation(as the case may be), can be increased, or bumped, by the amount designated under paragraph 88(1)(d). Once it is determined that a particular property is eligible for the bump (including that it is not ineligible property ) 4, the mechanics of the bump computation under paragraph 88(1)(d) can be divided into three parts: Determine the overall bump room available in respect of all of the subsidiary s property, Determine the bump limitations for each particular property, and Designate the bump amount in respect of each particular property which is to be bumped. Overall Bump Room The overall bump room is, in very simple terms, the difference between the outside basis in the subsidiary s shares and the net inside basis of the subsidiary. First, it depends upon the ACB of the shares of the subsidiary immediately before the wind-up or amalgamation. In a typical buy-bump-sell scenario, the relevant ACB is generally the amount paid to acquire the shares, plus any capitalized costs of acquisition, plus any further contributions to the target company s capital that are added to the ACB post-acquisition (but before the windup or amalgamation). In the Diagram 1 example, the relevant amount is the ACB of the shares of Target Co held by Acquisition Co. The overall bump room is, to be more specific, equal to the amount by which this outside ACB exceeds the amounts described in subparagraphs 88(1)(d)(i) and (i.1). The amount in subparagraph 88(1)(d)(i) is, in general terms, the total cost amount of all property owned by the subsidiary and its money on hand immediately before the wind-up or amalgamation, less the total of the debt of the subsidiary and certain reserves claimed by the subsidiary. The amount in subparagraph 88(1)(d)(i.1) is, in general terms, equal to the total of any amounts received by the parent (or by a non-arm s length person) on the subsidiary shares (or any shares for which the subsidiary shares were substituted or exchanged) in the form of deductible taxable dividends, capital dividends or life insurance dividends. In the example in Diagram 1 (assuming the absence of debt, relevant reserves or dividend payments), the overall bump room is basically equal to the tax cost of the Target Co s shares to Acquisition Co less the tax cost of all of Target Co s property immediately before the wind-up/amalgamation. Specific Bump Limitations The specific bump limitation is set out in subparagraph 88(1)(d)(ii), which provides that the amount designated to bump the cost of a particular property cannot exceed the amount by which the fair market The adian Petroleum Tax Society 3

4 adian Petroleum Tax Journal Vol. 23, value ( FMV ) of the particular property, at the time that the parent last acquired control of the subsidiary (the AOC time ) exceeds the cost of the property immediately before the winding-up (the WU time ). Accordingly, the cost of a particular property after the bump cannot exceed the FMV of the property at the AOC time. This timing is generally of concern in a buy-bump-sell scenario, as any post-acquisition increases in the FMV of the foreign affiliates cannot be sheltered by a subsequent bump. As a result it is generally advisable to complete the bump-sell as soon after the buy as possible. As discussed below, however, the proposed amendments may require the completion of surplus balance computations, leading to potentially costly delays in determining whether a buy-bump-sell can be completed in a tax-efficient manner. The proposed amendments, released in various forms since 2004, provide for specific bump limitations for shares of a foreign affiliate owned by the subsidiary prior to the wind-up or amalgamation. Proposed Amendments - Round 1 (2004) Original Bump Limitation Proposals Prior to the release of the first of the proposed amendments on February 27, 2004 ( Round 1 ), it was possible to acquire control of a adian target company, cause the target s foreign affiliate to pay a tax-free dividend (i.e., paid out of exempt surplus or taxable surplus with underlying foreign tax), and thus to reduce the value of the foreign affiliate shares post-acquisition. Upon a subsequent amalgamation or windup, the foreign affiliate shares could still be bumped so that the cost would equal the FMV of the shares at the AOC time. The Department of Finance introduced the Round 1 rules to prevent this perceived double-dipping. The Round 1 proposals provided for the addition of new paragraph 88(1)(d.4), which provided that, for the purposes of the specific bump limitation rule in subparagraph 88(1)(d)(ii), an amount would be deemed to be added to the cost of any foreign affiliate shares owned by the subsidiary equal to where A x B/C, A = dividends received on a share of the foreign affiliate that was deductible by the subsidiary or by any non-arm s length corporation, except to the extent that the dividend resulted in a reduction of exempt or taxable surplus arising after the AOC time, B = the FMV of the particular foreign affiliate share at the WU time, and C = the total FMV of the foreign affiliate shares held by the subsidiary at the WU time. Given that the bump is limited by the cost of the foreign affiliate shares to the subsidiary before the WU time, a deemed increase in the cost would limit the bump available. Accordingly, any deductible dividends paid by the foreign affiliate to the subsidiary or to any non-arm s length corporations would reduce the specific bump room available under subparagraph 88(1)(d)(ii), unless the dividend reduced post-acquisition surplus balances. The adian Petroleum Tax Society 4

5 adian Petroleum Tax Journal Vol. 23, It was soon realized that this proposed provision would limit the bump room available regardless of whether the dividends were paid before or after the AOC time. It was inappropriate to limit the bump room available in respect of pre-acquisition of control dividends, which should already have been taken into account in determining the FMV of the shares at the AOC time, and, as noted above, the bump is limited by the FMV at the AOC time. In response to this concern, the 2005 IFA Seminar, the Department of Finance announced that it planned to refine proposed paragraph 88(1)(d.4) so that only dividends that were deductible under paragraphs 113(1)(a) or (b), paid after the AOC time, and paid out of the foreign affiliate s surplus earned before the AOC time would reduce the bump room under subparagraph 88(1)(d)(ii). However, proposed amendments to effect this refinement were not announced until December of 2009, as discussed below. Original Surplus Grind Proposals The 2004 proposals also contained proposed subsections 5905(5.1) and (5.2) 5 of the Income Tax Regulations (the Regulations ), which provided that the surplus balances and underlying foreign tax of a foreign affiliate would be restated if the 88(1)(d) bump was claimed in respect of the shares of the foreign affiliate or in respect of an interest in a partnership which held such shares. In simple terms, the surplus of the foreign affiliate in respect of the parent or amalgamated corporation following the bump would include only the surplus that already existed in respect of the parent corporation prior to the acquisition of control and any surplus generated after the acquisition of control. That is, if the foreign affiliate was already a foreign affiliate of the parent corporation prior to the AOC time, the surplus balances in respect of the parent would remain, but the parent or amalgamated corporation following the wind-up or amalgamation would not inherit any surplus balances that existed in respect of the subsidiary for periods prior to the acquisition of control. Similarly, the surplus balances of lower-tier foreign affiliates of the subsidiary were also restated where a bump designation was made in respect of an upper-tier foreign affiliate s shares or partnership interest that held such upper-tier foreign affiliate shares. It is worth noting that, given that surplus balances are computed to reflect earnings (or net earnings) of a foreign affiliate at the end of a foreign affiliate s taxation year, where an acquisition of control occurred partway through a taxation year, the earnings of the foreign affiliate for that year should be inherited by the parent or amalgamated corporation despite making a bump designation. The surplus denial rule was an all or nothing rule it would apply as long as the bump was claimed by the parent on the foreign affiliate shares. It did not matter whether the bump fully increased the cost of the foreign affiliate shares to their FMV. In a buy-bump-sell scenario, under this proposed rule it was necessary to determine whether to make a bump designation or to forgo the bump and make an election under subsection 93(1). Round 2 (2009) The addition of proposed 88(1)(d.4) was abandoned in the December 18, 2009 foreign affiliate proposals, although a substantially similar rule applies for an interim period. Similarly, the proposed surplus denial rules in subsections 5905(5.1) and (5.2) of the Regulations were substantively changed and moved to different The adian Petroleum Tax Society 5

6 adian Petroleum Tax Journal Vol. 23, sections of the Regulations (although, again, similar rules apply for the interim period). In particular, the December 18, 2009 proposals contained two regimes that apply for different periods under the relevant application rules. What I have referred to in this article as Regime A applies where there is a winding-up that begins, or an amalgamation that occurs, after February 27, 2004, and the acquisition of control preceding the amalgamation winding-up did not occur after December 18, Regime B applies where the acquisition of control preceding the amalgamation or winding up occurs after December 18, Under both regimes, the specific bump limitation rule in paragraph 88(1)(d)(ii) is amended such that an amount designated to bump a particular property cannot exceed the amount by which the FMV of the property (at the AOC time) exceeds the total of (A) the cost of the property (at the WU time) and (B) the prescribed amount. Accordingly, the new prescribed amount reduces the bump room available for a particular property. The computation of the prescribed amount differs between the two regimes. Regime A (Interim Rules) Bump Limitation (Regime A) Where Regime A applies, the prescribed amount is defined under new subsection 5905(5.13) of the Regulations to be equal to the total of any dividends received, after the AOC time, on shares of the foreign affiliate held by the subsidiary, that are deductible under paragraphs 113(1)(a) or (b), except to the extent that the dividend reduced exempt or taxable surplus arising after the AOC time. This interim proposed rule is therefore substantively the same as Round 1 with the additional refinement described by the Department of Finance at the 2005 IFA Seminar. Surplus Grind (Regime A) Regime A also requires that the pre-aoc surplus balances be reduced in a manner similar to the 2004 proposals. Proposed subsections 5905(5.11) and (5.12) of the Regulations effectively provide that, where shares of a foreign affiliate, or interests in a partnership that holds such shares, have been bumped under paragraph 88(1)(d), the surplus balances of the foreign affiliate in respect of the subsidiary are deemed to be nil. Accordingly the pre-aoc surplus in respect of the subsidiary disappears and only the pre-aoc surplus (if any) that existed in respect of the parent corporation (together with any post-aoc surplus) is preserved. Regime B (New Rules) In the December 18, 2009 proposals as they apply for AOCs that occur after December 18, 2009, Finance introduced the concept of the tax-free surplus balance ( TFSB ), which is relevant for purposes of the new surplus grind rules and the bump limitation rule. It was described by the Technical Notes for the December 18, 2009 draft Regulations as a measure of the good surplus inherent in the particular affiliate. Good surplus is, generally, the aggregate of exempt surplus and the gross-up amount of underlying foreign tax (i.e. taxes paid in respect of taxable surplus). The adian Petroleum Tax Society 6

7 adian Petroleum Tax Journal Vol. 23, The TFSB is computed under subsections 5905(5.5) and (5.6) of the Regulations and is, essentially, equal to the consolidated exempt surplus and taxable surplus (to the extent it is covered by grossed-up underlying foreign tax) of the foreign affiliate and any lower-tier foreign affiliates. In particular, subsection 5905(5.5) of the draft Regulations provides that the TFSB of a foreign affiliate in respect of a adian corporation is the total of: (a) the amount by which the affiliate s exempt surplus in respect of the corporation exceeds its taxable deficit in respect of the corporation; (b) the lesser of (i) the affiliate s underlying foreign tax grossed up for the relevant tax factor, and (ii) the amount by which the affiliate s taxable surplus exceeds the affiliate s exempt deficit in respect of the corporation. For the purpose of computing the TFSB of a foreign affiliate, subsection 5905(5.6) of the draft Regulations effectively provides that the foreign affiliate s exempt surplus, exempt deficit, taxable surplus, taxable deficit and underlying deficit are determined on a consolidated basis with the balances of any lower-tier foreign affiliates in which the foreign affiliate has an interest. The particular provision requires these amounts to be computed as though subparagraph 5902(1)(a)(i) of the draft Regulations applies immediately before the time for which the TFSB is determined. Subparagraph 5902(1)(a)(i) was specifically designed to consolidate surplus balances in an upper-tier affiliate for purposes of making a subsection 93(1) election. It deems each lower-tier foreign affiliate in which the upper-tier affiliate has an interest to have paid a dividend equal to the lower-tier affiliate s net surplus in respect of the corporation (i.e., the adian corporation) to the upper-tier foreign affiliate, and as a result, the upper-tier affiliate s surplus is increased by the distributions received by it. This results in the consolidation of the surplus balances in the upper-tier affiliate immediately before it is deemed to pay the dividend under the subsection 93(1) election. Subsection 5902(2) of the draft Regulations contains interpretive rules for the purposes of paragraph 5902(1)(a). In particular, paragraph 5902(2)(i) applies in determining the surplus of a particular foreign affiliate in which another foreign affiliate has an equity percentage, and states that no amount is included in respect of any distribution that would have been received from the other affiliate. This rule appears to prevent doubling-up of the consolidated surplus where there is cross-ownership between two foreign affiliates. Paragraph 5902(2)(ii) states that if a foreign affiliate has issued shares of more than one class, the amount that is considered to have been paid as a dividend on the shares of any class is the portion of its surplus that, in the circumstances, would reasonably have been expected to have been paid on all of the shares of that class. It is unclear how the consolidation rule is intended to apply where two or more foreign affiliates own shares of a lower-tier affiliate. If the upper-tier foreign affiliates own shares of different classes in the lower-tier affiliate, presumably the deemed distribution under 5902(1)(a)(i) should be limited to an amount that would reasonably have been received on that class under paragraph 5902(2)(ii). If two or more upper-tier foreign The adian Petroleum Tax Society 7

8 adian Petroleum Tax Journal Vol. 23, affiliates own the same class of shares of the lower-tier affiliate, however, there does not appear to be an allocation or ordering rule that would avoid including the surplus balance of the lower-tier foreign affiliate in the consolidated TFSBs of both of the upper-tier foreign affiliates, given that the TFSBs appear to be computed at the same time for each upper-tier foreign affiliate owned by a adian corporation (whether the computation is for purposes of the surplus grind or the bump designation). Surplus Grind (Regime B) Following an acquisition of control of a adian corporation, subsection 5905(5.2) may reduce the exempt surplus balances of any top-tier foreign affiliates held directly by the adian corporation. 6 The surplus grind is not dependent on whether or not a bump designation is made and in fact, does not depend on whether there has been a wind-up or amalgamation. The surplus grind applies for purposes of determining the exempt surplus of a top-tier foreign affiliate immediately before an acquisition of control of the adian corporation and accordingly, the grind needs to be computed prior to determining the TFSB for purposes of the application of the bump limitation rules described below. The exempt surplus of a top-tier foreign affiliate is reduced to the extent that the TFSB of the foreign affiliate, plus the cost of the foreign affiliate shares to the adian corporation, exceeds the FMV of the foreign affiliate shares. Such amounts are determined at the time that is immediately before the time that is immediately before the AOC time. Accordingly, if the ACB of the affiliate shares plus the affiliate s TFSB exceeds the FMV of the foreign affiliate shares, the exempt surplus is reduced by the excess amount. Subsection 5905(5.3) provides an ordering rule to ensure that any adjustment under subsection 111(4) that is made to the ACB of the shares of the foreign affiliate will occur prior to the computation of the TFSB under subsection 5905(5.2). As a result, any write-downs or increases in the ACB of the foreign affiliate shares under paragraphs 111(4)(c) and (e) respectively would be taken into account before the TFSB is computed. Bump Limitation (Regime B) Subsection 5905(5.4) of the draft Regulations generally provides that the prescribed amount for the purpose of subparagraph 88(1)(d)(ii) bump limitation is, where the bumped property is a share of a foreign affiliate, equal to the TFSB of the foreign affiliate in respect of the subsidiary corporation, determined at the AOC time. Paragraph 5905(5.4)(b) and subsection 5908(7) of the draft Regulations provide similar rules where a foreign affiliate is owned through a partnership. As noted above, the exempt surplus of a top-tier affiliate may be reduced under subsection 5905(5.2) of the Regulations and this must be taken into account before the TFSB is computed for purposes of the bump limitation. Bump vs. 93(1) Election In the past it was often considered that the bump and a subsection 93(1) election were interchangeable in a buy-bump-sell scenario, but in many cases, the bump was used because it was more efficient to make the bump calculations than to try to compute a foreign affiliate s consolidated surplus balances with any degree of The adian Petroleum Tax Society 8

9 adian Petroleum Tax Journal Vol. 23, accuracy or timeliness. Under the new rules, however, to complete a buy-bump-sell it will be necessary to determine the consolidated surplus of a foreign affiliate group regardless of whether a bump or subsection 93(1) election is used. While this may be good news for international tax advisors who are hired to perform the detailed computations, it introduces a high level of inefficiency and uncertainty into the process. This point was raised by the Joint Committee on Taxation of the CICA and CBA in letters to the Department of Finance. In particular, the Joint Committee submitted that taxpayers should be able to amend the bump designation and 93(1) elections, and that there should be an exemption from the surplus grind rule where a bump and sale occurs shortly after an acquisition of control (i.e., within 90 days) and the foreign affiliate s surplus has not been utilized by the taxpayer following the acquisition. The Joint Committee submitted that such an exemption would greatly reduce complexity for both taxpayers and the CRA. Proposed subsections 88(1.8) and (1.9), released on August 27, 2010, partially address these concerns by permitting an amended 88(1)(d) bump designation to be made in certain circumstances. In particular, the proposals permit an amended designation under paragraph 88(1)(d) to be made in respect of a foreign affiliate share within ten years after the original due date, if, in the opinion of the Minister, it would be just and equitable to allow the taxpayer to permit the amendment, and if the corporation made reasonable efforts to determine the foreign affiliate s TFSB. The Technical Notes released with the August 27, 2010 proposals stated that although the ability to amend such a designation is subject to the discretion of the Minister, it is generally expected that the "just and equitable" standard would be met where the taxpayer's computation of the relevant TSFB requires adjustment because of a foreign tax assessment or an adjustment on audit by the Minister, provided that reasonable efforts have been made in the initial determination. The following examples illustrate some of the various possible iterations of the new surplus grind and the bump limitation rules and the 93(1) election. The adian Petroleum Tax Society 9

10 adian Petroleum Tax Journal Vol. 23, Diagram 2. Surplus Grind: No surplus Foreign Parent Co Acquisition Co ACB $1,000 Bump: Overall bump room = $800 88(1)(d)(ii) bump limitation for FA 1 shares: Bump cannot exceed the amount by which the FMV [$600] exceeds (ACB [$100] + TFSB [$0])= $500 Maximum bump for FA 1 shares = $500 Bumped ACB of FA 1 shares = $600 ACB $100 Target Co ACB $100 93(1) No 93(1)) election required (no surplus) Opco FA 1 FMV $600 Exempt Surplus $0 FA 2 Exempt Surplus $0 Diagram 2 illustrates the basic case where there is no TFSB in Target Co s foreign affiliates. Given that there is no exempt surplus or taxable surplus with underlying foreign tax, a subsection 93(1) election would not be available. However, a full bump designation could be made. The adian Petroleum Tax Society 10

11 adian Petroleum Tax Journal Vol. 23, Diagram 3. Foreign Parent Co Surplus Grind: FA 1 s ES is reduced by amount by which TFSB [$ ] + ACB [$100] exceeds FMV [$600] = $100 reduction FA 1 s resulting ES = $400 New TFSB = $400+$100 = $500 ACB $100 Acquisition Co Target Co ACB $1,000 ACB $100 Bump: Overall bump room = $800 88(1)(d)(ii) bump limitation for FA 1 shares: Bump cannot exceed the amount by which the FMV [$600] exceeds (ACB [$100] + TFSB [$500])= $0 Maximum bump for FA 1 shares = NIL ACB of FA 1 shares = $100 Opco FA 1 FMV $600 Exempt Surplus $500 93(1) 93(1)) election is required Elect $500 dividend from ES FA 2 Exempt Surplus $100 Diagram 3 illustrates a situation where the aggregate of the ACB of the foreign affiliate shares and the TFSB exceeds the fair market value of the shares. In this case, there is both a surplus grind and a bump limitation, and no bump is available. If FA1 is transferred out of ada, a subsection 93(1) election would be required in order to treat the proceeds of disposition as an exempt surplus dividend. The adian Petroleum Tax Society 11

12 adian Petroleum Tax Journal Vol. 23, Diagram 4. Foreign Parent Co Surplus Grind: FA 1 s ES is reduced by amount by which TFSB [$ ] + ACB [$100] exceeds FMV [$600] = $NIL (no grind) Acquisition Co Bump: Overall bump room = $800 ACB $100 Target Co ACB $1,000 ACB $100 88(1)(d)(ii) bump limitation for FA 1 shares: Bump cannot exceed the amount by which the FMV [$600] exceeds (ACB [$100] + TFSB [$200])= $300 Maximum bump for FA 1 shares = $300 Bumped ACB of FA1 shares = $400 Opco FA 1 FMV $600 Exempt Surplus $100 93(1): Both a bump and a 93(1) election is required Elect $200 deemed dividend out of ES FA 2 Exempt Surplus $100 In Diagram 4, the aggregate of the TFSB and the ACB of the FA1 shares is less than their fair market value. While there is no surplus grind, there is a bump limitation. In order to transfer FA1 out of ada on a tax-free basis, both a bump designation and a subsection 93(1) election would be required. In each case, the amount of the TFSB would be impacted by foreign currency exchange. In general, foreign affiliates maintain their surplus balances in non-adian currencies, and the conversion of the surplus balances to adian currency is required only at the time of a distribution (or, in the case of a subsection 93(1) election, a disposition). Under the proposed surplus grind and bump limitation rules, the surplus pools will have to be converted into adian currency at an appropriate FX rate, presumably the prevailing rate immediately before the acquisition of control of the adian target company. The adian Petroleum Tax Society 12

13 adian Petroleum Tax Journal Vol. 23, Conclusion The tax consequences of removing (or not removing) a adian target company s foreign affiliates out from under ada can have a significant impact on the financial model for the acquisition. The proposed amendments significantly impact the implementation of standard buy-bump-sell tax structuring. As such, the rules should be considered and discussed with a foreign buyer s management team early on in the preacquisition process. Further, given that computing the foreign affiliate surplus balances of a large multinational group can involve many months of work and hundreds of thousands of dollars in fees, the state of the target s surplus calculations should be examined at an early stage in the tax due-diligence process. 1 Of Couzin Taylor, LLP, allied with Ernst & Young LLP. I thank Warren Pashkowich for his assistance in my preparation of this paper and the conference presentation. 2 All statutory references are to the Income Tax Act (ada) (the Act ), including proposed amendments as indicated herein. 3 Advice should also be obtained regarding the tax consequences in the jurisdictions where the particular foreign affiliate and any lower-tier foreign affiliates are resident, and where the assets or business operations of each of the foreign affiliates are located. 4 For simplification, it is assumed that the foreign affiliate shares discussed in the examples in this article are eligible for the bump. The bump eligibility rules are beyond the scope of this article. 5 Subsection 5905(5.1) applied in respect of a vertical amalgamation and subsection 5905(5.2) applied in respect of a winding-up. 6 Similar rules apply under new subsections 5908(1) and (6) in respect of foreign affiliate shares owned by a partnership of which the adian corporation is a member. The adian Petroleum Tax Society 13