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Ottawa, July 18, 2005
2005-049

Revised Legislative Proposals Released Relating to the Taxation of Non-Resident Trusts and Foreign Investment Entities and Other Technical Amendments to the Income Tax Act

Related documents:

• Backgrounder

• Legislative Proposals Relating to Income Tax

• Explanatory Notes to Legislative Proposals Relating to Income Tax

Minister of Finance Ralph Goodale today released revised legislative proposals to amend the Income Tax Act. The legislation relates to the taxation of income of non-resident trusts and foreign investment entities as well as a number of other technical amendments. The legislative proposals, which relate to previously announced measures, are being released today to provide guidance to taxpayers in anticipation of the amendments being tabled in Parliament in the fall.

Non-Resident Trusts and Foreign Investment Entities

Draft legislation to implement changes relating to non-resident trusts and foreign investment entities was released for comment in 2000, 2001 and 2002, followed by the tabling of a detailed Notice of Ways and Means Motion in Parliament in October 2003. The revised legislative proposals released today are based on the Motion tabled in 2003 while reflecting comments received by the Department of Finance since that time. Generally, the proposals would take effect for taxation years that begin after 2002.

Reimbursement of Crown Charges

The proposals released today include amendments to the rules governing Crown charge reimbursements. These amendments, which were previously released for comment on December 21, 2004, have been modified in response to commentary received on the draft.

Technical Amendments

Today’s release also includes a number of technical amendments to the Income Tax Act that correct or clarify the application of existing income tax provisions, implement measures that have already been announced or deal with other income tax situations that require a legislative response. These amendments were last released as Part 1 (General Amendments) of a package of legislative proposals released on February 27, 2004. Part 2 of that package, dealing with foreign affiliates, will be included in a separate legislative package to be finalized for tabling at a later date.

Revised explanatory notes are also being released. References to "Announcement Date" in the proposed legislation and explanatory notes should be read as referring to today’s date. A backgrounder providing more details on the proposals is attached. Comments on these proposals should be submitted to the Tax Legislation Division of the Department of Finance by September 15, 2005.

The legislative proposals and explanatory notes are available on the Department of Finance website. Printed copies are available for $35 each and may be obtained by calling the Department of Finance Distribution Centre at (613) 995-2855.

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Backgrounder

Non-Resident Trusts and Foreign Investment Entities

The proposed measures dealing with non-resident trusts and foreign investment entities are designed to ensure that Canada taxes income earned by Canadians through foreign intermediaries in the same manner that that income would have been taxed if it had been earned directly. The proposals were first announced in the 1999 budget.

The proposals released today contain revisions made to the October 2003 Notice of Ways and Means Motion. Some of the more significant changes include:

• Limiting the circumstances in which Part XIII of the Income Tax Act will apply to non-resident beneficiaries of trusts that are deemed resident in Canada.

• Clarifying the circumstances in which interests in commercial foreign investment trusts, that are exempted from the deemed residency provision of the non-resident trust rules because of the "exempt foreign trust" rule, will generally be subject to the rules for foreign investment entities.

• Clarifying the rules that provide relief from double taxation in respect of income earned by Canadians through foreign intermediaries such as foreign investment entities.

Reimbursement of Crown Charges

The proposals released today include amendments to the rules governing Crown charge reimbursements. The modifications include a provision permitting a taxpayer to increase certain Crown charge reimbursements made to a partnership before September 17, 2004. In addition, these proposed amendments provide for an addition to the adjusted cost base of a partnership interest in circumstances where a member of a partnership reimburses a Crown charge imposed on the partnership.

Technical Amendments

Today’s release includes a number of proposed technical amendments to the Income Tax Act. The majority of these proposed amendments were first released in December 2002, and were reissued with certain additional measures in a package of draft legislative proposals released in February 2004. The technical amendments released today also include:

• A number of changes to the proposed rules providing for a tax deferral in respect of amounts transferred from a deceased taxpayer’s registered retirement savings plan in circumstances where the funds are used to acquire a qualifying life annuity that is payable to a trust, the beneficiary under which is a mentally infirm spouse or common-law partner of the taxpayer or a mentally infirm, financially dependent child or grandchild of the taxpayer.

• Measures to avoid the triggering of inappropriate and non-economic ("phantom") losses as a result of the technical application of the rules in section 132.2 of the Act to transactions that were not contemplated at the time the rules were drafted.