Tainting of excluded entity status by individuals (pp. 2-7)
- The inclusion in eligible group entities of resident corporations or trusts that are related to the taxpayer in the application of the “excluded entity” exemption has the effect of requiring corporate groups controlled by respective siblings to be aware of each other’s affairs.
- For example, a corporation group controlled by one sibling relying (under para. (b) of the excluded entity definition) on its annual interest and financing expenses being under $1 million would also need to take into account the IFE of the resident corporations in a group controlled by a second sibling.
- Similarly, if the first sibling group was instead relying on the para. (c) exclusion, it would be offside if there was relevant participation in the structure of the second sibling’s group by a family trust one of whose related beneficiaries had ceased to be a resident.
Potential iterative calculation where additional non-capital loss of another taxation year is used to offset additional taxable income arising from an EIFEL interest deductibility restriction (p. 9)
[W]here the EIFEL calculation of a taxpayer for the present year results in a material EIFEL restriction, and the taxpayer deducts a noncapital loss of another taxation year against taxable income of the present year, this calculation can result in circularity where additional non-capital loss of another taxation year is used to offset additional taxable income arising from an EIFEL interest deductibility restriction. This results from having to determine iterative addbacks (under Variable B, paragraphs (h) or (i)) to ATI resulting from the additional non-capital loss carryforward or carryback so deducted.
Potential inclusion in RAIFE of capital losses from excluded property (p. 11)
- Notwithstanding the Explanatory Notes’ statement that the RAIFE/RAIFR definitions are only applicable respecting amounts relating to FAPI and FAPL, such definitions encompass any amounts included in ss. 95(2)(f)(i) and (ii) and, in this regard, there does not appear to be an exclusion for amounts computed under s. 95(2)(f)(i) for capital gains or losses in respect of dispositions of excluded property.
- A potential example is a capital loss arising under s. 95(2)(i) that is deemed to be from the disposition of excluded property.
Issues with s. 95(2)(f.11)(ii)(D) rule (pp. 12-13)
- S. 95(2)(f.11)(ii)(D) provides, respecting s. 95(2)(f)(ii) (but not (i)) amounts included in the RAIFE of a CFA of a Canadian taxpayer for a taxation year, for a denial of such RAIFE amounts otherwise deductible in computing FAPI in proportion to the overall denial (if any) computed under s. 18.2(2) – so that deduction of the RAIFE of the CFA is potentially subject to the same proportionate denial as for its Canadian parent in respect of the parent’s IFE (although note that s. 95(2)(f.11)(ii)(D) does not apply to an excluded entity).
- However, the rules do not seem to explicitly provide for situations where a foreign affiliate is a CFA of two or more Canadian taxpayers, each with a different potential denial proportion under s.18.2(2) so that it might be necessary to perform separate FAPI calculations for different Canadian taxpayers with a participating percentage in the same CFA.
- Also note that the above approach imposes a denial in the same proportion across all the CFAs of the Canadian taxpayer, regardless of each CFA’s own ratio of RAIFE to income, and is in respect of the CFA’s own RAIFE, without a netting of its RAIFR against that RAIFE.
Benefit of election/ potentially an all-or-nothing election (pp. 13-14)
- S. 95(2)(f.11)(ii)(E) provides for an election to forego FAPL amounts (derived from RAIFE) otherwise realized in a taxation year of a CFA of a Canadian taxpayer in exchange for non-inclusion of an equivalent amount in its RAIFE.
- This election can be beneficial where the FAPL for the year has more value in reducing the current year’s RAIFE (and thus IFE of the Canadian parent) than it would in a future or prior year as a FAPL carryforward or carryback.
- As the election is limited to the lesser of the CFA’s FAPL and RAIFE for the year, there appears to be no ability to elect to forego only a portion of FAPL for the year (i.e., the election is potentially an all or nothing proposition if the FAPL amount is the lesser amount in s. 95(2)(f.11)(ii)(E)(II)).
No ability to accrue unused excess capacity (p. 17)
- S. 18.21(2) reflects an intention that a taxpayer subject to the group ratio cannot accrue excess capacity for carryforward as cumulative unused excess capacity.
Allocation of financing to purpose-built residential rental (pp. 18-19)
- The proposed definition of “exempt interest and financing expenses” references inter alia the expenses that are reasonably attributable to the portion of the borrowing used by the taxpayer for the purpose of acquiring, building or converting a purpose-built residential rental.
- Since a “purpose-built residential rental” can refer to a part of a mixed-use building, there could be significant uncertainties associated with allocating a financing to such portion of the project.
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