On February 27, 2014, Canada’s Department of Finance released draft legislative proposals relating to the taxation of Canadian banks with foreign affiliates.
The proposals contain modifications to those released for consultation on November 27, 2012, and address comments received during the consultation. They deal with revisions to the so-called “base erosion” rules in the Income Tax Act’s foreign accrual property income regime, which were announced in Budget 2012. The Government will proceed with legislation at an early opportunity to implement the amendments.
The draft legislation includes modifications to the November 27, 2012 proposals that, among other things:
- Introduce rules to address the interaction between the excess liquidity proposals and the existing upstream loan rules;
- Ensure that the relief under the securities trading proposals applies in respect of trades in Canadian indebtedness;
- Expand the securities trading proposals to cover all property traded on a recognized stock exchange;
- Update the “market maker” exception from the base erosion rules;
- Provide a more targeted anti-avoidance rule in the excess liquidity proposals; and
- Extend the relief under the excess liquidity proposals to certain hedging agreements.
These measures are generally effective for taxation years that begin after October 31, 2012. The rules concerning interaction between excess liquidity proposals and upstream loan rules and will apply in respect of any foreign affiliate taxation years beginning after February 27, 2014.
