On July 14, 2008, the Minister of Finance released
long-awaited draft legislation to amend the Income Tax
Act (Canada) and enable the tax-deferred conversion of
certain income funds (referred to as Specified Investment
Flow-Through entities or SIFTs), as well as real estate
investment trusts (REITs) into corporations. The comments made
below regarding to SIFTs also apply to REITs, though relatively
few REITs are expected to convert.
Those who had hoped for a relatively simple tax-deferral
mechanism will be disappointed by the current legislative
proposal. It is dense. While the Department of Finance can be
largely excused for this given the complexity of the details
with which they were dealing, the proposed rules fall short of
covering some aspects of expected conversion transactions. They
also create potentially important distinctions between similar
transaction types without apparent justification. Affected
taxpayers should proceed with caution. Further amendments are
The guts of the proposed rules are two alternative
tax-deferred conversion mechanisms:
A Tax-Deferred Unit For Share Exchange. SIFT
unitholders will be permitted by amendments to Section 85.1
of the Income Tax Act to exchange their units for
shares of a taxable Canadian corporation on a tax-deferred
basis without going through the cumbersome election procedure
required by subsection 85(1).
A Tax-Deferred Distribution Of Corporate Shares To
SIFT Unitholders. A SIFT may distribute shares of a
taxable Canadian corporate subsidiary to its unitholders on a
tax-deferred basis under proposed subsection 107(3.1). The
SIFT would restructure its holdings before making this
distribution so that this subsidiary owns all of the
Generally, as a result of each type of tax-deferred
transaction, SIFT unitholders will dispose of their units
without recognizing a gain or loss. They will also receive
corporate shares that will have the same cost for tax purposes
as did the units. Elections are not required to be filed.
To qualify for the deferral, certain conditions must be met.
In each case, transactions that would in general lead to the
dissolution of the SIFT must be completed within a 60-day
period, and before 2013. In the unit-for-share exchange, only a
single class of shares may be issued in exchange for the units.
As well, only shares may be issued for units that are subject
to the deferred exchange, and these shares must have a value
equal to the units' value.
The proposed rules also cover a variety of ancillary issues,
including the following:
employee stock option;
acquisitions of corporate control; and
taxable Canadian property.
In addition, the conversion rules raise certain policy
issues for continued debate. For example, they provide ample
fodder for those who argue that, far from creating a level
playing field for SIFTs and corporations, the proposed rules
continue to tilt the field in favour of the corporate model.
The rules also make the conversion into leveraged corporations
more difficult than was expected, indicating a possible policy
position that requires examination.
The proposed SIFT conversion rules are a significant step in
the right direction. Given the complexity of the issues to be
dealt with, it would be unusual for a first draft to cover all
of the important issues. Senior officials from the Ministry of
Finance are soliciting feedback from the tax practitioner
community on the rules. Further legislative proposals are
For a detailed discussion regarding conversion mechanisms,
policy and technical issues, further planning considerations
and other ancillary issues, please see the
article published on our website.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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