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Government of Canada Releases Draft Foreign Affiliate Rules

Department of Finance Canada Press Release dated August 19, 2011


The Honourable Jim Flaherty, Minister of Finance, today released for consultation a package of draft legislative proposals relating to the Income Tax Act and Income Tax Regulations concerning the taxation of Canadian multinational corporations with foreign affiliates.


The package includes revisions to the foreign affiliate reorganization and distribution rules originally proposed in a February 27, 2004 release. It also includes new proposals in place of the 2004 proposals which suspended certain gains from the sale of shares and other assets of foreign affiliates for the purposes of the surplus accounting rules.


Consistent with the approach adopted in a December 18, 2009 release in which other measures from the 2004 proposals were revised and simplified, the legislative proposals being released today 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.


At this time, however, the priority of the Government is to encourage 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 measures released today are aimed at improving the current international tax system, which the Panel characterized as a “good one that has served Canada well.”


The Government remains committed to continuing its review and analysis of all of the Panel’s recommendations and consideration of further legislative amendments.


The attached Annex outlines the key measures proposed in today’s package, while explanatory notes provide further details.


References to “Announcement Date” in the draft legislation and explanatory notes should be read as referring to today’s date.


Interested parties may submit comments on the package until October 19, 2011. The Government will then proceed with legislation at an early opportunity to implement the amendments, taking into account comments received.


Comments can be sent to [email protected] or to:


Tax Policy Branch

Department of Finance

140 O’Connor Street

Ottawa, Ontario

K1A 0G5


Click here for a copy of the proposal or download the document: Download Foreign_Affiliates_Legislative_Proposal


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