Only extends to shares of Cancos
Ss. 87(8.4) and (8.5) in the 16 September 2016 draft legislation provide a tax deferral only for shares of taxable Canadian corporations and, thus, do not extend to shares of a non-resident corporation or of a partnership or trust which are TCP.
No relief where upstream lender ceases to be an FA
The proposed continuity rules in ss. 90(6.1) and (6.11) do not provide relief from an income inclusion under the upstream loan rules where a lender ceases to be a foreign affiliate of Canco within the two-year period.
Safe harbour does not extend to upper tier hybrid partnerships
Similarly to draft s. 91(4.5), the exceptions in ss. 91(4.6)(b) and 126(4.12)(b) also should be revised to encompass any partnership in the direct ownership chain (rather than just the operating partnership) that is treated as a corporation under the relevant foreign law.
Recognition should be based on PP rather than SEP changes
The triggering event for a stub period under s. 91(1.2) should be a change in the participating percentage rather than in the surplus entitlement percentage. For example, all the income of the FA in question might be allocable for the year to preferred shares (i.e., the preferred shareholder’s PP is 100%) so that it would not be appropriate to trigger the rule based on a change in the year of the SEP of a holder of the FA’s common shares.
Otherwise de minimis changes effectively are linked to another change not part of the series
The de minimis exception in s. 91(1.1)(b) does not apply to a large number of trivial SEP changes (e.g., where there is an employee stock option plan on the shares of the FA) if there is also a larger SEP change in the year, even if this does not occur as part of the same series of transactions.
Rule does not extend to individuals and trusts
Furthermore, the exception for situations where the acquisition or disposition resulting in a decrease in SEP for the taxpayer leads to a corresponding increase in SEP for one or more non-arm’s length taxpayers does not extend to such taxpayers who are Canadian individuals or trusts.
Excluded property test not appropriate
It would be preferable for the rules in ss. 91(1.4) and (1.5) to apply by default, with taxpayers being able to elect to have these rules not apply. Furthermore, it is not apparent why, where there is a disposition of the particular FA’s shares by a CFA of the taxpayer, the shares must be excluded property immediately thereafter.
Exclusion of arm’s length purchase from NR inappropriate if carve-out rule unavailable
The unavailability of s. 91(1.5) (allowing a purchaser to have a stub period year end) to an arm’s length purchaser from a non-resident can generate an inappropriate result where the s. 95(2)(f.1) carve-out rule is unavailable to the purchaser (in respect of whom the FA might already have been an FA).
Expansion of s. 212.3(2)(a) to “other Canadian corporations”
S. 212.3(2)(a) is being expanded to investments other than by a CRIC in its own FA – for example, where a US-resident individual owns USCo which owns CaSub, the FAD rules will apply where a CCPC owned by his Canadian brother invests in an FA of the CCPC.
Penal consequences of not filing
A late-filing dividend under s. 212.3(7)(d) is not eligible for the dividend substitution election under s. 212.3(3)
Effect on look-through rule interpretation
The addition of s. 212.3(18)(b)(viii) may imply that a broader range of transfers are not capable of coming within the s. 212.3(25) partnership look-through rules. The requirement that s. 97(2) apply should be removed.
The formula in s. 212.3(9)(b)(i) can operate to under-reinstate PUC.
Tainting effect of minor previous reinstatements
The condition in s. 219.1(3)(c) is too restrictive because any amount of previous reinstatement under s. 212.3(9) would preclude a reinstatement under s. 219.1(4).
The draft DFA amendment erroneously refers to an obligation that is “capital property” rather than an “obligation.”
Adverse implication re convertible shares
The proposed addition of Reg. 6204(1)(b)(iv) seems to imply that a convertible voting share would not be a prescribed share if it were reasonable to consider that the conversion right would be exercised within the two-year period.