Tax memo: October 24, 2012 Notice of Ways and Means Motion: Changes to upstream loan and foreign tax credit generator rules

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Memo No. 2012-43

On October 24, 2012, Canada’s Department of Finance (Finance) released a Notice of Ways and Means Motion (NWMM). This “comprehensive package of technical income tax legislation” implements a variety of outstanding technical tax amendments, including legislative proposals relating to the taxation of Canadian corporations with foreign affiliates.

This Tax memo will discuss changes made by the NWMM to the:

  • upstream loan rules; and
  • foreign tax credit generator proposals

On August 19, 2011, Finance introduced new rules to cause certain loans from a foreign affiliate of a corporation resident in Canada to a “specified debtor” to be included in the income of the Canadian taxpayer (the August 2011 Proposals). Although the Canada Revenue Agency (CRA) had expressly permitted loans from foreign affiliates to Canadian corporations in the past (even of amounts representing taxable surplus), Finance indicated that these new rules were necessary to support the integrity of the taxable surplus and the then newly introduced “hybrid surplus” regimes. However, these rules can result in an income inclusion for a taxpayer even when no such taxable or hybrid surplus exists.