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Joint Committee, "Foreign Affiliate Dumping, Derivative Forward Agreement and Transfer Pricing Amendments Announced in the 2019 Federal Budget", 24 May 2019 Submission of the Joint Committee
- It is understood that the expansion to non-resident controlling individuals or non-arm’s length groups is not aimed principally at CRICs controlled by private equity (PE) funds.
- The foreign affiliate dumping (FAD) rules should be “turned off” where the non-resident controlling individual had ceased to be a Canadian resident in the preceding 5 years or in circumstances where the CRIC shares were bequeathed by a controlling Canadian-resident individual to a non-resident individual.
- A de minimis exception to the FAD rules should be added.
- The addition of the concept of control by a group of non-resident persons not dealing with each other at arm’s length (a “NAL group”) is fraught since this is a difficult question of fact which very well might be impracticable for the CRIC to determine. In addition, why should a NAL group who have gone to the trouble to negotiate a shareholders agreement for the CRIC be regarded as the real direct investors in the FA? Furthermore, the s. 212.3(16) exception would be very difficult to apply where the deemed “parents” do not exercise control.
- Given the practical infeasibility of complying with the “more closely connected business” (“MCCB”) exception, a replacement relieving rule should apply where a CRIC is not controlled by a non-resident corporation and it is reasonable to consider that none of the main reasons for making the investment was tax deferral or avoidance.
- The s. 212.3(16) exception should be changed to target a measure simply of whether the business of the subject corporation is more closely connected to the business of the CRIC and its FAs rather than of the non-resident parent.
- The existing s. 212.3(16) exception is simply unworkable where the deemed “controlling” person is a trust beneficiary. In addition, s. 212.3(26)(c) could deem multiple discretionary beneficiaries to each own 100% of the shares owned by the trust, leading to multiple incidence of tax on multiple deemed dividends. Given that the core premise - that absent tax considerations, the investment in the FA would have been made by the discretionary beneficiary - is almost certainly false, s. 212.3(26)(c) should be scrapped.
- Ss. 212.3(26)(a) and (b) also are unnecessary – if the CRIC is controlled by a Canadian-resident trust (albeit, with non-resident beneficiaries), the CRIC will in reality be controlled by Canadian-resident decision makers.
- Also, mutual fund trusts and testamentary trusts arising on the death of a resident individual should be excepted trusts.
- However, a more specific anti-avoidance rule could be added.
- An example of the (likely, many) anomalies that will occur in the operation of the reorganization rules if the scope of the s. 212.3(1) scoping rule is expanded, an internal transfer within one of the members of a NAL group might disqualify an otherwise compliant amalgamation under s. 212.3(18)(c)(ii).
- Para. (b) should refer to payments under either a synthetic equity arrangement or a derivative forward agreement, as the case may be, that are connected to a Canadian permanent establishment.
- Re para. (c), it is counter-intuitive to suggest that every discretionary trust is tax-indifferent.
- Anomalies can also arise under paras. (d) and (e), e.g., for a partnership held on an 85/15 basis by a taxable Canadian corporation and pension fund.
- The amendment to s. 152(4)(b)(iii) should be made applicable to taxation years ending on or after March 19, 2019.
- The ss. 15(2) and (2.11) rules should permit PLOI loans to be made by a CRIC to any non-resident person who is a “parent” under the expanded s. 212.3(1)(b) rule.
- The appropriate consequence of failing to meet the commercial transaction exception solely as a result of the new limitation is that only the portion of the purchaser’s return that is attributable to ordinary income and that has been converted to a capital gain should be taxed as ordinary income. This should be clarified.