Canada: Government’s mandate to improve integrity of Canadian tax system continues with enactment of Bill C-4
On December 12 2013, Canada enacted Bill C-4, implementing a variety of income tax measures announced in the March 2013 federal budget. One of the stated themes of the budget was improving the integrity of the Canadian tax system and Bill C-4 included a number of new anti-avoidance measures, including an extension of Canada's thin-capitalisation rules and new rules regarding derivative forward agreements (DFAs) and synthetic disposition arrangements (SDAs). Before Bill C-4, Canada's thin-capitalisation rules, which prevent foreign investors from taking profits out of Canada entirely in the form of tax-deductible interest rather than after-tax dividends, only applied to direct and indirect debts of Canadian resident corporations. Effective for taxation years beginning after 2013, Bill C-4 extends these rules to Canadian resident trusts, as well as to debts of non-resident corporations and trusts that carry on business in Canada. For non-resident corporations and trusts, the rules use a notional equity amount based on the cost of property used in such businesses.
The new rules for DFAs and SDAs are targeted at arrangements that synthesise the economic results of certain transactions (for example receipt of certain income streams in the case of DFAs and disposition of appreciated assets in the case of SDAs) without triggering the full corresponding tax consequences. These rules seek to align such tax and economic results but the rules, though aimed at a narrow range of perceived abuses, are broadly drafted and could potentially apply to many transactions.
Bill C-4 also included rules to enact earlier proposals to deny certain deductions in respect of publicly traded stapled securities.
Foreign entities operating in Canada should confirm that their arrangements comply with the expanded thin-capitalisation rules, and should be mindful of the potential impact of the other anti-avoidance rules.
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