On July 12, 2013 Finance released several proposed amendments (see http://www.fin.gc.ca/drleg-apl/Itedst-irdatv-0713-eng.asp). The following is a quick summary of selected items, which is not intended to be exhaustive.
- Functional currency tax reporting. A change is being made to s. 261(3)(b): a functional currency election must now be filed on or before 60 days after the first day of the first year for which the taxpayer wishes to compute its Canadian tax results using its (elected) functional currency. This change will be useful for short taxation years, which can occur in the context of acquisitions and amalgamations.
- Taxable Canadian property and partnerships. Paragraph (e) of the definition of taxable Canadian property in s. 248(1) is being amended to ensure that a disposition by a partnership of taxable Canadian property constitutes a disposition of taxable Canadian property by a non-resident partner of the partnership for the purposes of s. 2(3). This change follows a technical problem identified by the CRA in 2010-0385931I7 (see http://www.thor.ca/blog/2013/06/gain-on-shares-of-canadian-pubco-not-taxable-to-non-resident-partners/).
- Stub period FAPI of foreign affiliates. A change is being introduced to ensure that “stub period” foreign accrual property income (FAPI) of a foreign affiliate is included in the Canadian taxpayer’s income for the year in which the taxpayer disposes of, or reduces, its interest in the foreign affiliate (s. 91(1.1)). An exception applies for certain transactions within a corporate group, where the disposition of shares of a controlled foreign affiliate by one group member does not result in a decrease in the overall surplus entitlement percentage of the group in that affiliate (s. 91(1.2)).
- New anti-avoidance rule for foreign affiliate mergers. Certain foreign mergers may be undertaken on a tax-deferred (rollover basis), including foreign mergers where the Canadian company (Canco) receives shares in a foreign parent company of the foreign merged entity (s. 87(8)). An anti-avoidance rule (s. 87(8.3)) is being introduced to deny this rollover where the following conditions are met: after the merger shares of the foreign merged entity are excluded property of a foreign affiliate of Canco (i.e., the foreign parent), the foreign merged entity is also a foreign affiliate of Canco, and the merger is part of a series of transactions that includes a sale of the shares of the foreign merged entity to an arm’s length person. The rule is intended to replicate, in a foreign triangular merger context, the existing anti-avoidance rule in s. 85.1(4).
- Australian trust deemed to be foreign corporation. New s. 93.2 introduces a special regime for certain trusts resident in Australia in which a foreign affiliate of a Canco has a beneficial interest. Where the required conditions are met, the Australian trust is deemed (for specified purposes) not to be a trust but rather a non-resident corporation. The special regime is limited to Australian trusts, as that country has unique tax and commercial rules that make commercial trusts a preferred entity to carry on certain types of active business activities.