Elimination of purpose test (p. 2)
- Given the breadth of the “series of transactions” concept, the proposed elimination of the purpose test could result in significant uncertainty.
Switch to carve-out for s. 17 CFAs (pp. 2-3)
- While the intention was to limit the opportunity for tax-deferred “out-from-under transactions,” moving from the current qualifying interest (votes and value) test to a voting control test (based on CFA status) could potentially facilitate avoidance transactions.
Application of subsequent disposition rule to dispositions by Canadian taxpayers, and lack of proportionality (p.3)
- Relevant subsequent dispositions should not extend to dispositions of foreign affiliate shares by a Canadian taxpayer (even if such shares derive value from the shares of the first affiliate) - nor to dispositions of shares of the Canadian taxpayer or of shares further up the chain.
- Further, proportionality should apply, so that a disposition of shares of another foreign affiliate deriving any of their FMV from the shares of the first affiliate (or substituted property) only leads to a denial of rollover treatment on a proportionate basis.
Excluded property test should be applied only once at time of subsequent disposition (pp. 3-4)
- The excluded property test should be applied regarding the excluded property status of the property that is disposed of on the subsequent disposition, and the (existing) requirement to test the excluded property status of the property of the first affiliate at the time of the initial transfer should be eliminated.
Failure of s. 95(2)(b)(i)(B) amendments to address a partnership structure (pp. 6-7)
- The s. 95(2)(b)(i)(B) amendments address that, under current legislation, a disproportionate amount of FAPI can arise where the participating percentage in the payee affiliate is higher than the participating percentage in the payer affiliate.
- However, inequitable results can arise where partnerships are involved. For example, Canco wholly-owns FA1 and has a 60% controlling interest in a partnership (P1) carrying on an investment business and paying services fees to FA1. P1, as a deemed s. 96(1) resident, would have a 100% participating percentage in FA2 for income computation purposes, so that the aggregate participating percentage in FA2 for s. 95(2)(b)(i)(B) purposes would be 100%.
- From a policy standpoint, the amount of the services fee that is included under s. 95(2)(b)(i)(B) in this scenario should be limited to 60%.
Need to assimilate ancillary provisions to s. 95(3.03) tests (p. 7)
- Although proposed s. 95(3.03) is modelled on the provision of relief in existing s. 95(2)(a)(ii)(D) where inter-affiliate interest is paid by an FA Holdco rather than being paid by the underlying FA Opco, it is problematic that the various ancillary rules applying for the purposes of s. 95(2)(a) do not extend to proposed s. 95(3.03) to ensure its proper operation, including inter alia regarding the “throughout the year” requirement (ss. 95(2.2) and (2.01)), qualifying interest status (s. 95(2)(n)), and deeming rules for intervening partnerships (ss. 95(2)(y) and 93.1(5) and (6).)
Issues where holding partnership (pp. 7-8)
- It is problematic that para. (c) of proposed s. 95(3.03) requires that the services fees be paid or payable “by the second affiliate,” since services fees that are paid or payable by a holding partnership in which a FA is a member can be subject to s. 95(2)(b) (i.e., if they are deductible in computing the FAPI of the FA member). Accordingly, a corresponding rule to s. 93.1(4) should be introduced (although “the requirement in subsection 93.1(4) that all members of the partnership be foreign affiliates should not be extended to paragraph 95(2)(b), given that the latter only applies to the extent that the amounts are deductible by a foreign affiliate.”)
- S. 95(3.03) should be extended to situations where services fees are incurred by a FA Holdco that has invested in an underlying partnership that holds excluded property shares (there is a similar deficiency in s. 95(2)(a)(ii)(D).)
“Subject to tax” requirement (p. 8)
- Similarly, while the “subject to tax” requirement in s. 95(3.03) is modelled on the requirements of existing s. 95(2)(a)(ii)(D), there appears to be no policy rationale to base the application of subsection 95(3.03) on whether the payer affiliate and its directly held subsidiaries are subject to tax.
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