Table of Contents Overview...iii Introduction... 1 General Comments... 1 Legislation Scheme... 1 Overview of Foreign Affiliate Taxation System...

Transcription

1 Table of Contents...iii Introduction... 1 General Comments... 1 Legislation Scheme... 1 of Foreign Affiliate Taxation System... 2 Taxation of Foreign Affiliate Earnings... 2 FAPI Rules... 2 Additional Readings... 4 Dividends from Non-Resident Corporations (Section 90) Application... 9 Distributions from Non-Resident Corporations... 9 General Comments (subsec 90(1))... 9 Stock Dividends... 9 Dividends from Foreign Affiliates (subsecs 90(2), (5))...10 Qualifying Return of Capital (subsecs 90(3), (4))...11 Transitional Rules...12 Additional Readings...12 Deductions in respect of Dividends...12 General Comments...12 Individuals...14 Corporations...14 Part IV Tax and the Dividend Refund...14 Upstream Loans...15 General Comments...15 Upstream Loan Income Inclusion Rules (subsec 90(6), (7), (15))...15 Back-to-Back Loans (subsec 90(7))...19 Upstream Loan Income Inclusion Exceptions (subsec 90(8)) Deductions Available in respect of an Income Inclusion (subsecs (90(9) (12)) Deduction upon Repayment of Loan (subsecs 90(13), (14))...25 Examples...26 Additional Readings...29 Amounts Included re Foreign Affiliates (Section 91) Application...32 Arrangement of Subject...32 General Outline of FAPI Provisions...33 The Imputation of FAPI...33 What is FAPI?...34 Applicable Rules of Computation...34 Losses...36 Foreign Taxes...36 Relevant Tax Factor...36 Amounts to be Included in respect of a Share of a Foreign Affiliate...36 The Nature of FAPI...36 The Manner in Which the Imputation is Made...37 v

2 Foreign Affiliate...37 Controlled Foreign Affiliate...43 Participating Percentage...46 Reserve Where Foreign Exchange Restriction...50 Amounts Deductible in respect of Foreign Taxes...50 General Comments...50 Example...50 Foreign Accrual Tax (FAT)...51 Foreign Tax Credit Generators (FAT Denial Rules)...54 Amounts Deductible in respect of Dividends Received...58 Example...59 Non-arm s Length Transfer of Shares of a Foreign Affiliate...59 Acquisition of Shares of a Foreign Affiliate from a Partnership...59 Compliance Considerations...60 General Comments...60 Foreign Affiliate Compliance Calendar...60 Calendar Notes...64 Adjusted Cost Base of Share of Foreign Affiliate (Section 92) Application...67 Adjustments in respect of Imputed FAPI (subsec 92(1))...67 Example...68 Fill-the-Hole Rules (subsec 92(1.1), Regs 5905(7.1) 7.7))...68 General Comments...68 Surplus Adjustments...68 Cost Base Adjustments...71 Examples...72 Additional Readings...75 Deduction in respect of Dividends Paid out of Pre-Acquisition Surplus (subsec 92(2))...75 Example...75 Adjustments in respect of Elective Deduction under 113(2) (subsec 92(3)) Recognition of Dividends Paid out of Pre-Acquisition Surplus on Shares Held by Partnership (subsecs 92(4) to (6)) Transitional Rules Adjustments in respect of Section 93 Election (former subsecs 92(1.2) to (1.5))...76 Disposition of Shares in Foreign Affiliate (Section 93) Application...86 Election re Disposition of Shares in Foreign Affiliate...86 General Rules...86 Limitation in respect of Underlying Foreign Tax Applicable...87 Example...87 Other Considerations...88 Election where Shares Disposed of by Foreign Affiliate...88 Election where Shares Deemed Disposed of under Subsection 40(3)...89 Historical Note...89 Deemed Election where Shares Disposed of by Foreign Affiliate...89 Historical Note...90 Election where Shares Held by Partnership...90 General Election Mechanism (subsec 93(1.2))...90 vi

3 Disposition by an FA of Shares of Another FA (subsec 93(1.3))...91 Time and Manner of Election...92 Transitional Rules Amended Election...93 Loss Limitation on Disposition of Shares...93 Exempt Dividends (para 93(2.01)(a))...93 Foreign Exchange Losses (para 93(2.01)(b)) Loss Limitation on Disposition of Shares by Partnership or on Disposition of Partnership Interest...96 Historical Note...97 Loss on Disposition of Shares of Foreign Affiliate...98 Additional Readings...98 Shares Held and Dividends Received by a Partnership (Section 93.1) Application General Comments Look-Through Rule Applicable to Dividends Historical Note Tiered Partnerships Partnership Deemed to be Corporation Computing FAPI in respect of a Partnership Additional Readings Non-Resident Corporations Without Share Capital (Section 93.2) Application Rollovers Related Partnership Rules Transitional Rules Australian Trusts (Section 93.3) Application Foreign Affiliate Dumping Rules Amalgamations and Windups Transitional Rules Definitions and Rules (Section 95) Advisory Panel on Canada s System of International Taxation Application Arrangement of Subject Selected Definitions Controlled Foreign Affiliate Direct Equity Percentage (subsec 95(4)) Entity (subsec 95(1)) Equity Percentage (subsec 95(4)) Excluded Property (subsec 95(1)) Foreign Accrual Tax (subsec 95(1)) Foreign Affiliate (subsec 95(1)) Participating Percentage (subsection 95(1)) Permanent Establishment (subsec 95(1)) Relevant Cost Base (subsec 95(4)) vii

4 Relevant Tax Factor (subsec 95(1)) Surplus Entitlement Percentage (subsec 95(1)) Taxation Year (subsec 95(1)) Foreign Accrual Property Income (subsec 95(1)) Items Excluded from FAPI Income from an Active Business (95(1) FAPI A) Deemed Active Business Income Recharacterization Rules (para 95(2)(a)) Other Items Excluded from FAPI (FAPI A(a) (d), H) Interest Exempt under Paragraph 81(1)(m) (95(1) FAPI A(a)) Inter-Affiliate Dividends (95(1) FAPI A(b), H) Taxable Dividends Deductible under Section 112 (95(1) FAPI A(c)) Interest Benefits Included under Subsection 80.4(2) (95(1) FAPI A(d)) Taxable Capital Gains Excluded from FAPI (95(1) FAPI B, paras 95(2)(f.1) (i)) Items included in FAPI Income from Property (95(1) FAPI A) Deemed Property Income Base Erosion Rules (95(1) FAPI A, paras 95(2)(a.1) (b)) Other Items Included in FAPI (95(1) FAPI A, A.1, A.2, B, C, E) Income from a Non-Qualifying Business (95(1) FAPI A) Taxable Capital Gains Included in FAPI (95(1) FAPI B, E) Income from the Settlement or Forgiveness of Indebtedness (95(1) FAPI A.1, A.2, G, para 95(2)(g.1)) Income in respect of an Offshore Investment Fund Property (95(1) FAPI C) Foreign Accrual Property Losses and Capital Losses General Comments Losses Deductible from FAPI (95(1) FAPI D) Allowable Capital Losses Deductible from FAPI (95(1) FAPI E) Carryover of Foreign Accrual Property Losses (95(1) FAPI F) Carryover of Foreign Accrual Capital Losses (95(1) FAPI F.1) Fresh-Start Rules (paras 95(2)(j.1) (k.2)) Regulated Businesses Transitional Rules Reorganizations General Comments Inter-Affiliate Dispositions (para 95(2)(c)) Inter-Affiliate Foreign Mergers (paras 95(2)(d), (d.1)) Inter-Affiliate Dissolutions (para 95(2)(e)) Distribution Received on a Foreign Spin-Off (para 95(2)(g.2)) Additional Readings Special Rules Income Bonds or Debentures Issued by FAs (subsec 95(5)) Where Rights or Shares Issued to Avoid Tax (subsec 95(6)) Stock Dividends (subsec 95(7)) Historical Note: Bill C-28 Elections Income from Foreign Affiliates (Section 113) Application Arrangement of Subject Surplus Distribution Ordering Rules Order of Surplus Distributions (Reg 5901) viii

5 Pre-Share Apportionment of Surplus Distributions (Reg 5900) Dividends Paid Out of Exempt Surplus (para 113(1)(a)) Exempt Surplus Deduction Available Dividends Paid Out of Hybrid Surplus (para 113(1)(a.1)) Hybrid Surplus Deduction Available Example Dividends Paid Out of Taxable Surplus (paras 113(1)(b), (c)) Taxable Surplus Deduction Available in respect of Underlying Foreign Tax (UFT) Deduction Available in respect of Non-Business-Income Tax Example Dividends Paid Out of Pre-Acquisition Surplus (para 113(1)(d)) Additional Deduction in respect of 1975 Adjusted Cost Base (subsec 113(2)) Computation of Exempt, Hybrid and Taxable Surplus General Comments (Regs 5907(1), (1.01), (7)) Surplus Account Computation Period (Regs 5907(1), (3)) Selection of Currency (Reg 5907(6)) Components of Exempt Surplus (Reg 5907(1)) Components of Hybrid Surplus (Reg 5907(1)) Components of Taxable Surplus (Reg 5907(1)) Exempt, Hybrid and Taxable Deficits (Reg 5907(1)) Tax Payments and Tax Losses of Consolidated Groups (Regs 5907(1.1) (1.22)) Adjusted Earnings from an Active Business General Comments Definition of Earnings (Reg 5907(1)) Computation of Adjusted Earnings (Regs 5907(2) (2.6), (2.9), (4), 5908(13), (14), 5910) Allocation of Adjusted Earnings among Surplus Accounts (Regs 5906, 5907(11) (11.2)) Other Components of Exempt and Taxable Earnings General Comments Foreign Accrual Property Income Immigrating FA (Regs 5907(13) (15)) Capital Gains and Losses (Regs 5907(5)-(6), (12)) Disposition of Eligible Capital Property (Reg 5907(1) exempt earnings (a.1)) Income from Property Recharacterized as Income from an Active Business (Regs 5907(1) exempt earnings (d)(ii), (1.02), (2.7)) Deemed Dividends under Section 93 (Reg 5902) Amount of Whole Dividend Deemed to have been Paid (Reg 5902(1)) Anti-Circularity Rule (Reg 5902(2)(a)) Surplus Account Adjustments in respect of Elected Dividends (Reg 5902(1)(b), (2)(b)) Additional Readings Historical Note Surplus Account Adjustments General Comments Surplus Entitlement Percentage (Regs 5905(10) (13)) Acquisition of Additional Shares of an FA (Reg 5905(1)) Mergers (Regs 5905(3), 5907(8), (9.1)) ix

6 Non-Arm s Length Disposition of Shares of an FA (Regs 5905(5), (5.1)) Change in Control of Parent (Regs 5905(5.2), (5.3), 5908(6)) Prescribed Amount for Bump (Regs 5905(5.4), 5908(7)) Tax-Free Surplus Balance (Regs 5905(5.5) (5.7)) Dissolutions (Regs 5905(7), 5907(9)) Fill-the-Hole Rules (Regs 5905(7.1) (7.7), 5908(11), (12)) Special Rules Applicable to Partnerships (Reg 5908) Consolidated Net Surplus Election Additional Readings Advisory Panel Comments Income Tax Regulations Part LIX Part LIX Foreign Affiliates Foreign Affiliate Dumping (Section 212.3) Application Application of FAD Rules (subsec 212.3(1)) General Comments Investment Definition (preamble to subsec 212.3(2), subsec 212.3(10)) Foreign Affiliate Status of Subject Corporation (para 12.3(1)(a)) Control by Non-Resident Parent (para 212.3(1)(b)) Exceptions (para 212.3(1)(c)) Exception for Wind-Ups and Vertical Amalgamations (subsec 212.3(22)) Charging Provisions (subsec 212.3(2)) General Comments Deemed Dividend (para 212.3(2)(a)) Automatic PUC Suppression (para 212.3(2)(b)) Dividend Substitution Election (subsec 212.3(3)) General Comments Law Historical Note PUC Offset Rules (subsec 212.3(7)) Law Historical Note PUC Reinstatement (subsec 212.3(9)) Law Historical Note Partnerships (subsec 212.3(25)) Index x