Tax memo: October 24, 2012 Notice of Ways and Means Motion: Offshore investment fund rules revised

Memo No. 2012-52

The Notice of Ways and Means Motion (NWMM) released by Canada’s Department of Finance on October 24, 2012, revises the rules for taxing offshore investment funds (OIFs).

This Tax memo summarizes:

  • the OIF rules that can apply; and
  • the proposed changes to those rules – including transitional measures for taxpayers who voluntarily filed under the previously announced foreign investment entity (FIE) rules, which were never enacted.

The OIF rules apply to investments in non-resident entities, such as corporations, partnerships and trust funds, if it may be reasonable to conclude that:

  1. the non-resident entity derives its value, directly or indirectly, primarily from portfolio investments held by:
    • that entity; or
    • another non-resident entity, in shares, indebtedness, commodities, real estate, resource properties and currencies, among other things; and
  2. one of the main reasons for the taxpayer’s acquiring, holding or having the investment was to derive a benefit from the portfolio investments in such a manner that any tax on the income, profits or gains for any year is significantly less than it would have been if the taxpayer had earned the income, profits or gains directly.

For #2 above, all circumstances must be considered, including:

  • the nature of the entity, and its terms and conditions;
  • the degree to which tax has been reduced on the income, profits and gains; and
  • the extent to which the entity distributes income, profits and gains.

Read our Tax memo to learn more.