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Canada Drafts Legislation To Plug Tax Loopholes

Friday, July 27, 2012

Canada's Finance Ministry has proposed two legislative amendments to eliminate tax loopholes in respect of trusts, and publicly-traded corporations.

The first set of legislative amendments would implement measures announced on July 20, 2011, concerning the income tax treatment of specified investment flow-through entities (SIFTs), real estate investment trusts and publicly-traded corporations. To improve the 'fairness' of the tax system, the measures address authorities' concerns about transactions involving publicly-traded stapled securities, and aim to limit the deductibility of certain amounts in respect of these securities to limit avoidance.

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. Specifically, it is proposed that income tax provisions be 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.

The second set of legislative changes are in direct response to a ruling from the Tax Court of Canada. In the absence of the proposals, the government explained, this Court decision would make it more difficult for the government to enforce the withholding tax rule that applies to payments from Canadian resident trusts to non-resident beneficiaries in circumstances where a trust emigrates from Canada.

The proposals address situations in which a Canadian resident trust makes an amount payable to a non-resident beneficiary of the trust but only actually pays or credits the amount in the beneficiary’s favour at some later time after the trust has ceased to be resident in Canada. The legislative changes will provide that, in these circumstances, the amount will be deemed to have been paid or credited before the trust became non-resident.