With low interest rates on debt securities, taxpayers have been looking for ways to enhance their returns. The recent signing of tax information exchange agreements (TIEAs) with certain countries may entice taxpayers to look to those countries for creative investment options, because the TIEAs will now allow taxpayers to earn exempt surplus on active business income in countries that are considered “tax havens.”
However, paragraph 95(2)(l) of the Income Tax Act is an anti-avoidance provision that is aimed at active businesses that earn their income from trading or dealing in indebtedness. The Department of Finance enacted paragraph 95(2)(l) seemingly to allow only regulated foreign affiliates of regulated Canadian financial institutions to trade and deal in indebtedness without treating the income as foreign accrual property income (FAPI) that would be subject to tax in Canada.
This article offers insight on the interpretive issues and the practical application of the rules in paragraph 95(2)(l) to broader circumstances.