Canada Amends 'Tax Fairness' Law
Friday, July 22, 2011
The Canadian government is to amend its income tax legislation to bring in
changes to the tax treatment of specified investment flow-through entities (SIFTs),
real estate investment trusts (REITs) and publicly-traded corporations. The
changes were announced on July 20.
According to the government, its SIFT rules, in effect since 2007, have restored
balance and fairness to the income tax system by leveling the playing field
between publicly-traded trusts and partnerships and public corporations, by
treating SIFTs in much the same manner as public corporations. When the government
first introduced the proposals in 2006, as part of the Tax Fairness Plan, it
indicated that, were there to emerge any structures or transactions clearly
devised to frustrate the plan's objectives, the rules could be changed accordingly,
and with immediate effect. An SIFT is a publicly-traded trust or partnership
that holds “non-portfolio property”.
The rules are to be amended because recent transactions involving publicly-traded
stapled securities have raised concerns about the use of these types of structures
in a manner that frustrates the policy. Some SIFTs, including REITs and corporations,
have introduced these securities into their capital structures. The securities
have features that can provide tax advantages similar to those associated with
earlier income trust structures. The new proposals include measures to limit
the deductibility of certain amounts payable in respect of these securities.
The new rules would apply to the stapled securities of an entity that is a
trust, corporation or partnership, if one or more of the stapled securities
is listed or traded on a stock exchange or other public market and any of the
- The stapled securities are both issued by the entity;
- One of the stapled securities is issued by the entity, and the other by
a subsidiary of the entity; or
- One of the stapled securities is issued by a REIT or the subsidiary of a
In some structures involving stapled securities, a corporation or SIFT (alone
or together with a subsidiary) might issue equity and debt instruments –
at least one of which is publicly-traded – that are stapled together.
The proposals would see income tax provisions amended to provide that, notwithstanding
the general rules applicable to the deductibility of interest, interest that
is paid or payable on the debt portion of such a stapled security will not be
deductible in computing the income of the payer for income tax purposes. Accordingly,
stapling arrangements that involve only shares issued by publicly-traded corporations,
the distributions on which are treated as dividends for tax purposes, are not
intended to be affected by the amendment.
In other structures, a REIT (or a subsidiary of a REIT) might issue a security
to its investors in circumstances in which the security similarly can be transferred
only together with an interest in another entity, such as a trust or a corporation.
Typically, the other entity, directly or through its subsidiaries, carries on
a business or holds property that the REIT could not carry on or hold directly
without losing its status as a REIT. The income tax provisions are proposed
to be amended to provide that, notwithstanding the general rules applicable
to the deductibility of amounts, any amount (including, but not limited to rent)
that is paid or payable by the other entity (or its subsidiaries) to the REIT
(or its subsidiaries, and including “back-to-back” intermediary
arrangements) will not be deductible in computing the income of the payer for
income tax purposes.
In addition, the government will continue to monitor Canadian tax planning
for structures and transactions that might cause problems for the policy and
will, as necessary, take appropriate corrective action.
The proposals would apply to an entity in respect of an amount that is paid
or becomes payable on or after July 20, unless the amount is paid or becomes
payable during, and is in respect of, the entity’s transition period.
An entity would have a transition period only if stapled securities of the entity
were issued and outstanding on the day immediately before July 20.
Commenting on the plans, Finance Minister Jim Flaherty said: “These proposed
measures will ensure that the policy objectives of the Tax Fairness Plan continue
to be met. They also reflect our government’s ongoing commitment to address
structures that frustrate those policy objectives.”