Canadian foreign affiliate rules.

October 19, 2011

On October 19, 2011, Tax Executives Institute submitted the following comments in response to a Canadian Department of Finance consultation on proposed foreign affiliate legislation released on August 19. The comments, which took the form of a letter to Nancy Horsman, Assistant Deputy Minister (Tax Policy Branch) of the Canadian Department of Finance, were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Carmine A. Arcari of the Royal Bank of Canada. Contributing substantially to the development of TEI's comments was Glenn Stadtegger of TD Bank Financial Group. Also contributing to the submission were Rodney C. Bergen of The Jim Pattison Group, Marc Brochu of Alcoa Lt6e, David V. Daubaras of GE Canada Limited, and Bruce B. Hollebone of BP Canada Energy Company. Jeffery P. Rasmussen, TEI Senior Tax Counsel, is legal staff liaison to the Canadian Income Tax Committee and coordinated the preparation of the comments.

On August 19, 2011, the Department of Finance released a package of legislative proposals (hereinafter "the 2011 proposals or the proposals") to amend the foreign affiliate rules in the Income Tax Act, Canada (the Act) and the Income Tax Regulations (the Regulations). On behalf of Tax Executives Institute, I am writing to provide the Institute's comments on the proposals.

Background on Tax Executives Institute

Tax Executives Institute is the preeminent international association of business tax executives. The Institute's 7,000 professionals manage the tax affairs of 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal Toronto, and Vancouver, which together make up one of our nine geographic regions, and must contend daily with the planning and compliance aspects of Canada's business tax laws. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI concerns itself with important issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. In furtherance of this goal, TEI supports efforts to improve the tax laws and their administration at all levels of government. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the August 19, 2011, draft legislation on foreign affiliates.

General

The current proposals generally supplant the draft foreign affiliate legislation released on February 27, 2004 (the 2004 proposals) and supplement changes proposed on August 27, 2010. Overall the 2011 proposals represent an improvement over the 2004 proposals and we commend the Department for responding positively to the concerns of stakeholders, including TEL about the 2004 proposals. Regrettably, notwithstanding the improvements, some of the proposed measures are unworkable while others constitute a shift in tax policy that should either be abandoned or significantly revised. Specific comments in respect of the August 19, 2011, draft foreign affiliate proposals follow below.

More broadly, TEI regrets that the 2011 proposals do not implement the 2008 recommendations of the Advisory Panel on Canada's System of International Taxation to (1) broaden the exemption system to include all foreign active business income earned by foreign affiliates and (2) extend the exemption system to capital gains and losses realized on the disposition of shares of a foreign affiliate that derive all or substantially all their value from active business assets. (1) Despite the government's economic priority to ensure that Canada maintains one of the most competitive tax systems among the G7 countries, other countries, the United Kingdom especially, have moved farther and faster than Canada in respect of the treatment of active business income of foreign affiliates.

Upstream Loans

Section 90 of the Act includes in the income of a taxpayer resident in Canada any dividends received from a non-resident corporation. The Explanatory Notes to the 2011 proposals state that "section 90 is being significantly expanded to provide, among other things, specific rules for dividends from foreign affiliates and to address avoidance techniques involving so called 'upstream loans'." Specifically, proposed subsections 90(4) to (10) of the Act would introduce a series of "anti-avoidance rules designed to prevent taxpayers from making synthetic dividend distributions from foreign affiliates in order to avoid what would otherwise be income inclusions under new subsection 90(1) that are not fully offset by deductions under paragraphs 113(1)(a) to (b) of the Act." (2)

1. General

   TEI submits that the policy shift in respect of upstream loans to Canada will (1) restrict the ability of Canadian multinationals to redeploy capital into Canada, (2) encourage the redeployment and investment of foreign affiliate capital offshore, and (3) encourage Canadian multinationals to borrow from third parties, likely...