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 of Finance.
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.
