Tax Insights: July 12, 2013 draft legislative proposals: Important implications for foreign affiliates

Issue 2013-05

Canadian corporations with foreign affiliates may be affected by draft legislative proposals released by the Department of Finance on July 12, 2013.

Many of the proposals were the subject of comfort letters previously issued by the Department of Finance. Although released on July 12, 2013, the proposals have different effective dates, and in certain cases, elections are available to change the effective dates at the option of the taxpayer.

Key proposals:

  • modify the imputed income rules in section 17
  • ensure that various foreign affiliate rules better accommodate structures that include partnerships
  • narrow the scope of certain base-erosion rules
  • ensure an income inclusion for stub-period foreign accrual property income on dispositions of foreign affiliate shares
  • address taxes paid by shareholders of fiscally transparent entities
  • provide ownership rules for foreign non-share corporations, such as limited liability companies (LLCs)
  • amend the functional currency rules, e.g., by providing an earlier election deadline

The above changes and others are summarized with additional technical detail in our paper.

As a result of the enactment of Bill C-48 on June 26, 2013, and the release of these proposals, for the first time in over 10 years taxpayers with foreign affiliates may finally have certainty regarding the tax legislation governing transactions involving foreign affiliates.

Comments on the proposals must be submitted to the Department of Finance by September 13, 2013.