Canada To Update Foreign Affiliate Rules

by Mike Godfrey, Tax-News.com, Washington

23 August 2011

The Canadian government has launched a consultation on proposals to reform rules for the taxation of Canadian multinational corporations with foreign affiliates.

Finance Minister Jim Flaherty’s package of draft legislative proposals relates to the Income Tax Act and Income Tax Regulations. The government intends to revise the foreign affiliate reorganisation and distribution rules originally proposed in 2004. The earlier plans suspended certain gains from the sale of shares and other assets of foreign affiliates for the purposes of the surplus accounting rules.

In 2009, the government altered and simplified many of the 2004 proposals, and the latest legislative drafts, released on August 19, are intended to be easier for taxpayers to comply with and for the government to administer.

In its December 2008 report to the Minister of Finance, the Advisory Panel on Canada’s System of International Taxation recommended fundamental changes to Canada’s system of international taxation, particularly in respect of its exemption system for foreign source business income earned by foreign affiliates.

According to the Department of Finance, the government’s current priority is to encourage other countries to enter into Tax Information Exchange Agreements with Canada and to provide exempt surplus treatment as an incentive to those which choose to do so.

The consultation is open until October 19, after which point the government will proceed with legislation at an early opportunity to implement the amendments, taking into account comments received.

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