Tax memo: August 14, 2012 - Legislative proposals released as consultation draft

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Memo No. 2012-29

On August 14, 2012, the Department of Finance released for consultation draft legislative proposals that implement measures included in the March 29, 2012 federal budget. Comments on the proposals are due by September 13, 2012.

This Tax memo highlights international tax measures included in the August 14, 2012 legislative proposals. A more detailed Tax memo on these measures will follow shortly. In addition, we will release a Developments that addresses the Scientific Research and Experimental Development (SR&ED) proposals.

The international tax measures include the changes to the thin capitalization rules that, among other things:

• reduce the debt-to-equity ratio from 2-to-1 to 1.5-to-1, for taxation years beginning after 2012;
• extend the rules to debts of partnerships of which a Canadian resident corporation is a member, for taxation years beginning after March 28, 2012; and
• treat disallowed interest as dividends for Part XIII withholding tax purposes, for taxation years ending after March 28, 2012.

In general, the draft legislation to implement the changes to the thin capitalization rules contains few surprises.

One unexpected measure that was not included in the 2012 federal budget responds to submissions made relating to the shareholder loan rules. A Canadian corporation will now be permitted to make loans to foreign parent companies or related non-resident companies without incurring the deemed dividend withholding tax, on an elective basis. To avail itself of this elective relief from withholding tax, the Canadian corporation will be required to include in income interest at the prescribed rate plus 4% (thus, 5% for the third quarter of 2012).