Significant amendments to Canadian foreign affiliate rules
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Significant amendments to Canadian foreign affiliate rules

On August 19 2011, the Canadian Department of Finance released a package of proposed amendments including significant changes to the tax rules governing the taxation of income earned by foreign affiliates of Canadian taxpayers (the proposals).


Chris Van Loan

Josh Jones

One of the more significant changes included in the proposals is a new rule which could give rise to an income inclusion for a Canadian taxpayer where a foreign affiliate has made an upstream loan that remains in existence for two years or more. Canadian taxpayers will have until August 19 2013 to deal with existing structures affected by this new rule.

Another significant change is the introduction of a hybrid surplus pool which will encompass a foreign affiliate's gains and losses from the disposition of shares of foreign affiliates and certain other property. This rule is intended to eliminate the advantages gained by Canadian taxpayers from entering into certain transactions whereby shares of foreign affiliates are sold within a foreign affiliate group on a non-rollover basis to generate exempt surplus, which could be returned to Canada by way of tax-free dividends, but will have broader application.

Other changes included in the proposals include a new approach intended to simplify the characterisation of distributions from foreign affiliates and revisions to the rules governing acquisitions, dispositions and reorganisations of foreign affiliates.

These proposals represent the most significant package of amendments affecting foreign affiliates of Canadian taxpayers since 2004. Due to the introduction of some of these proposed amendments, a number of previously announced proposals are being abandoned. Since a number of amendments have retroactive application to transactions that occurred before August 19 2011, either on an automatic or elective basis, it is important that taxpayers review both current and past transactions to determine the impact of the proposals and whether any such elections should be made.

Chris Van Loan (, partner, and Josh Jones (, associate, Toronto

Blake, Cassels & Graydon

Tel: +1 416 863 2400

Fax: +1 416 863-2653


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