Significant amendments to Canadian foreign affiliate rules

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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).

van-loan.jpg
jones.jpg

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 (chris.vanloan@blakes.com), partner, and Josh Jones (josh.jones@blakes.com), associate, Toronto

Blake, Cassels & Graydon

Tel: +1 416 863 2400

Fax: +1 416 863-2653

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
Gift this article