Joint Committee comments on the new trust-reporting rules, 2-tier partnership losses, cross-border surplus stripping and tracking interest rules
The Joint Committee has submitted that the exceptions in draft ss. 150(1.2)(a) to (n), for the required expansion of trust reporting, are too narrow. For example, there should be an exception for trusts whose principal purpose is to secure arm’s length sale-agreement covenants, and the apparent requirement for lawyers to file a tax return disclosing inter alia the client name and trust amount re a client-specific trust is contrary to s. 8 of the Charter (see Chambre des Notaires).
Under the revised at-risk amount rules for multi-tier partnerships, there will be no ability to carryover unutilized limited partnership losses. A loss of a lower-tier partnership that exceeds an upper-tier partnership’s amount at risk in that lower-tier partnership is denied forever. This seems harsh, and alternatives are suggested that would not be overly complex.
Proposed s. 212.1(6)(b), which applies a look-through rule for the purpose of having s. 212.1 apply on a disposition by a partnership or trust, is overly broad as it looks through corporations. For example, when the non-resident seller (NRco) sells its interest in a partnership owning USco which owns Canco representing only 20% of the fair market value of the USco shares, s. 212.1 would appear to apply to the “sale” of the underlying Canco shares.
Where foreign investment funds are structured as corporate umbrella funds (i.e., with each sub-fund of the corporation being a separate investment fund for commercial and regulatory purposes), it is quite possible that there would only be a few Canadian investors in a particular Canadian-dollar sub-fund (with the manager typically hedging the sub-fund’s non-Canadian assets back to the Canadian dollar), so that the Canadian investor’s shares may very well be tracking interests. Making the s. 95(12) election may not be an adequate solution as the sub-fund may still be a controlled foreign affiliate to the electing Canadian investor if the sub-fund hedges its non-Canadian dollar exposures back to the Canadian dollar, since the Canadian dollar class or series will be seen as a separate tracked interest from the other interests in the sub-fund. Accordingly, such electing Canadian investors, holding a relatively small number of shares of the sub-fund, but more than 10% of the shares of the Canadian dollar class or series of the sub-fund, may be caught by the tracking interest rules.
Neal Armstrong. Summaries of Joint Committee 10 September 2018 Submission on the July 27, 2018 Legislative Proposals Released July 27, 2018 under s. 150(1.2), s. 163(6), s. 96(2.1)(f), s. 212.1(6)(b) and s. 95(12).