The Department of Finance yesterday announced proposed amendments to
the Income Tax
Act and Income Tax
Regulations as a legislative response to certain
court decisions that were unfavourable to the Canada Revenue
Agency. As is often the case with targeted legislative
"fixes", the actual draft legislation appears to have the
potential to be applied by the Canada Revenue Agency more broadly
than is perhaps necessary to meet the objectives of the Department
Two of the measures could be of particular interest to readers
of this blog. The first will add an additional requirement to the
existing interest withholding tax rules. Under the proposed rule,
in order for interest to be paid free of Canadian withholding tax
on a stripped coupon, the resident debtor must deal at arm's
length with both the non-resident holder of the coupon and with the
holder of the residual principal component (whereas the current
rule generally only requires the relationship between the debtor
and the holder of the coupon to be tested). As a result of this
amendment, it may be more difficult to sell stripped coupons (of
non-government issuers) to offshore investors - although some have
already suggested that the amendment may have provided a road map
for related party creditors to do exactly that.
The second will essentially require a taxpayer to defer the
portion of a deduction (or other outlay) that represents a
"contingent amount" until such amount is actually paid.
Due in large measure to the new "contingent amount"
definition - which does not require that a contingency exist at law
- there may be scope for the Canada Revenue Agency to use this
provision to restrict outlays and expenses claimed by taxpayers in
certain structured finance transactions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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