Canada: Stapled Securities Targeted/SIFT Relief For Subsidiary Entities

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, August 2011

On July 20, 2011, the Minister of Finance announced proposed amendments to the Income Tax Act (Canada) dealing with the taxation of specified investment flow-through entities (SIFTs), real estate investment trusts (REITs) and certain publicly traded corporations. The announcement, and the related backgrounder which describes the proposed amendments in more detail, includes amendments to address some structures involving stapled securities. Although no draft legislation was released, the amendments generally will take effect as of the announcement date, subject to limited grandfathering discussed below.


When the SIFT rules were originally announced on October 31, 2006, the Minister indicated that new legislation would be introduced to counter structures which might be devised to frustrate the policy objectives of the SIFT rules. The July 20 announcement indicates that certain recent transactions involving stapled securities have raised concerns that such structures are being used in a manner that the government believes frustrates those objectives.

"Stapled securities" are described in the backgrounder as securities which are not freely transferable independently of each other, including securities which may be "unstapled" at the option of either the holder or issuer unless the securities in question have been permanently and irrevocably unstapled. It is not clear when securities will be "not freely transferable independently of each other". This will likely mean that a prohibition on public trading of the securities separately will be considered stapling (even if it were legally possible to separately transfer the securities privately), but it could also mean that securities that are interconnected in such a manner that it would not be economically reasonable to acquire one without the other will be considered to be stapled.

The proposed amendments will apply to a particular trust, corporation or partnership that has issued stapled securities that are listed or traded on a stock exchange or other public market if either:

  • the stapled securities are both issued by the particular entity;
  • one of the securities is issued by the particular entity and the other security is issued by a subsidiary of that entity; or
  • one of the securities is issued by a REIT or a subsidiary of a REIT.

A subsidiary of a particular entity for these purposes means an entity in which the particular entity holds at least 10% of the equity value, and will also include a subsidiary of a subsidiary.


The proposed amendments include two separate rules to deny the deductibility of certain expenses incurred by issuers of stapled securities and their subsidiaries.

The first rule applies to SIFTs and corporations that issue stapled securities consisting of both equity and debt instruments, at least one of which is publicly traded. Examples would include income deposit securities (IDS) or income participating securities (IPS) structures in which a common share and a high-yield bond of an issuer trade together, but can typically be separated at the option of the holder. The proposed amendments will deny interest deductibility on the debt portion of such stapled securities. This provision targets structures designed to replicate the low entity-level taxation of an income fund by utilizing the interest deduction on stapled debt.

The second rule, applicable where stapled securities are issued by a REIT and another entity, will deny the deduction of all expenses paid or payable by the other entity (or its subsidiaries) to the REIT (or its subsidiaries). This provision targets structures where a REIT's units are stapled to the equity of another entity, such as a trust or corporation, which carries on a business or holds property that the REIT could not carry on or hold directly without losing its status as a REIT, and where rent or other deductible payments are made by such entity back to the REIT thereby shifting the income from that business or property back to the REIT in a form that would not impact the REIT's status and could be distributed by the REIT on a pre-tax basis. One example of such a structure is the InnVest Hotel REIT.

Some stapled security structures have been used to acquire U.S. businesses. In some of these situations, the interest deduction associated with the debt component of the stapled securities reduces U.S. taxable income and does not reduce income taxable in Canada. Similarly, payments from a U.S. entity to a REIT or one of its subsidiaries would generally impact U.S. tax rather than Canadian tax. Such structures may not be affected by these new deduction denial rules under Canadian law. However, each such cross-border structure will have to be examined to confirm that there is no current or future consequence to the denial of the deduction.

These amendments will generally apply to amounts paid on or after July 20, 2011, but entities with existing stapled securities on July 19, 2011 will be grandfathered until July 20, 2012. Further grandfathering until January 1, 2016 will be available to entities with existing stapled securities which also had stapled securities issued and outstanding on October 31, 2006. The benefit of such grandfathering will be lost if an existing stapled security of the entity in question is materially altered or if a security of the entity becomes a stapled security, which would appear to include a new issuance of an existing class of stapled securities. An issuance of stapled securities under the terms of an agreement, or of a stapled security, in existence before July 20, 2011, however, will generally be permitted.

Particularly for entities that had issued stapled securities before October 31, 2006, the immediate loss of grandfathering on the issuance of a new stapled security seems harsh. It might have been reasonable to allow for limited issuance of stapled securities using rules similar to the "normal growth guidelines" which were enacted to permit some growth for income trusts during the transition period for grandfathered SIFTs under the SIFT rules.


The July 20, 2011 announcement includes welcome relief for many privately held entities which may previously have been unintentionally caught by the SIFT rules. Because of the broad definition of a SIFT, there was a concern that privately held entities in which publicly traded entities invest could themselves become subject to the SIFT rules, notwithstanding that these rules are only intended to apply to publicly traded trusts and partnerships.

Under the SIFT rules, privately held trusts and partnerships which are wholly or partially owned by income trusts, public companies or other publicly traded entities may be treated as SIFTs unless they qualify as "excluded subsidiary entities". In order for an entity to be an excluded subsidiary entity under the current definition, the entity's equity cannot be held at any time by any person other than a REIT, a taxable Canadian corporation, a SIFT or an entity which is itself an excluded subsidiary entity. Because of this limitation, an entity would not qualify if an individual, a non-resident or a tax-exempt entity holds even a minimal equity interest.

The proposed amendments will broaden the classes of persons who are permitted to own equity of an excluded subsidiary entity to include any person or partnership other than a person or partnership that holds securities or rights in the entity that are or include a right to acquire either (i) a security of an entity that is listed or traded on a stock exchange or public market, or (ii) a property the amount, or fair market value, of which is determined primarily by reference to a listed or traded security. This amendment will solve the existing problem that arises where a publicly traded entity holds units of a trust or limited partnership where the other unitholders include individuals, tax-exempt entities and/or non-residents.

This amendment generally applies retroactively to October 31, 2006.

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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