The Foreign Affiliate Rules

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This book describes the Canadian income tax rules applicable when a Canadian resident has a direct or indirect interest in shares of a non-resident corporation that is a foreign affiliate. While the purpose of the foreign accrual property income (FAPI) regime and the foreign affiliate regime, can be simply described, the rules number in the hundreds and are immensely complex. In addition there are rules applicable with respect to the disposition of shares of foreign affiliates as well as other matters.

One guiding principle in structuring this book has been to focus on transactions and events as much as possible, since these are what practitioners face. For each type of transaction or event, the book brings together all the relevant FAPI and FA rules. The descriptions of rules specific to particular entities are generally relegated to separate chapters: Partnerships, Fiscally Transparent Foreign Affiliates, Financial Businesses, Institutions and Subsidiaries, Individuals, and Australian Trusts.

This 33-chapters book is based on the provisions of the Act and Regulations in force on April 1, 2020, and it briefly describes the amendments to the foreign affiliate dumping rules announced in the February 2019 federal budget and contained in draft legislation released on July 30, 2019. The rules that applied in prior years are not described, except occasionally.

The descriptions of rules specific to particular entities are generally relegated to separate chapters. Partnerships, Fiscally Transparent Foreign Affiliates, Financial Businesses, Institutions and Subsidiaries, Individuals, Australian Trusts.

The FAPI and foreign affiliate regimes are regarded by many tax practitioners as the most complex in the Income Tax Act and Regulations. While many articles have been written on aspects of the regimes, only a few books have been published that provide a thorough description of the rules.

The foundation for the discussion of specific transactions and events is laid by first describing the FAPI regime and then the FA regime (by the FA regime, we mean primarily the rules relating to the payment of dividends by foreign affiliates of resident corporations). Another guiding principle has been to describe the more specialized rules separately. For example, certain rules applicable only with respect to financial businesses and financial institutions are described in a separate chapter.

Numerous provisions have been added to the Act and Regulations since 2001 to address problems or to enable certain rules to apply with respect to structures that include partnerships. Those provisions have increased considerably the complexity of the FAPI and FA regimes. The application of the regimes to a structure that includes one or more partnerships is the topic of the longest chapter in the book (nicknamed the “monster chapter” when we were writing it), its length reflecting the fact that the rules for partnerships cut across the entire spectrum of the FAPI and FA rules.

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UpdatesN/A
FormatBook
Publication DateMay 31, 2020

Bill Holmes first qualified as an actuary, then switched careers to become
an income tax lawyer. He practiced as a solicitor with Thorsteinssons, retiring
from the partnership in 2007 but continuing to serve clients for a few years
after that. He had a wide-ranging practice, but also specialized in the FAPI and
foreign affiliate rules, executive compensation, and life insurance companies
and products. Bill was the principal drafter of the pension tax reform legislation
enacted in 1990 and 1991. From 1991 to 1995, he worked in the Tax Legislation
Division of the federal Department of Finance. From 2005 to 2007, Bill was Chair
of the National Tax Section of the Canadian Bar Association and Co-Chair of the
Joint Committee on Taxation.

 


Ian Gamble is tax counsel and a partner with Thorsteinssons LLP. He has
over 30 years of corporate, business, and international tax experience,
and represents a wide range of public and private clients in the mining,
telecommunications, real estate, marine, forestry, and oil & gas sectors. Ian
has been recognized as a leading tax lawyer by several publications, including
Guide to the World’s Leading Tax Advisers, Lexpert Guide to the Leading
US/Canada Cross-Border Corporate Lawyers in Canada, and Chambers’
Global Guide to the World’s Best Lawyers. Ian is the author of Taxation of
Canadian Mining (Carswell), a former Editor-in-Chief of the International Tax
Journal and Resource Sector Taxation Journal (Federated Press), a former
adjunct professor of corporate and international taxation at The University of
British Columbia, a former member of the Board of Governors and Executive
Committee of the Canadian Tax Foundation, and a frequent contributor to
tax-related publications and conferences.

Preface

Acronyms

Conventions

 

Part I – Introduction

Chapter 1 Introduction

Chapter 2 Fundamental Principles and Terms

 

Part II – FAPI Regime

Introduction to Part

Chapter 3 FAPI Regime

Chapter 4 Ancillary Definitions and Rules

Chapter 5 Foreign Accrual Property Income

Chapter 6 Characterization of Income and Losses

Chapter 7 Computation Rules

 

Part III – Foreign Affiliate Regime

Introduction to Part

Chapter 8 Foreign Affiliate Accounts

Chapter 9 Income and Capital Components of Surplus Accounts

Chapter 10 Surplus Entitlement Percentage

 

Part IV – Specific Amounts, Events and Situations

Introduction to Part

Chapter 11 Specific Amounts

Chapter 12 Fresh-Start Rules

Chapter 13 Group Taxation

 

Part V – Distributions

Chapter 14 Foreign Affiliate Dividends

Chapter 15 Distributions of Capital

 

Part VI – Acquisitions and Dispositions of Foreign Affiliate Shares

Introduction to Part

Chapter 16 Disposition of FA Shares by Resident Corporation

Chapter 17 Disposition by Foreign Affiliate of Shares of Another Foreign Affiliate

Chapter 18 Deemed Dividend on Disposition of Shares

Chapter 19 FA Account Consequences of Acquisition or Disposition of Shares

 

 

Part VII – Mergers and Liquidations

Introduction to Part

Chapter 20 Amalgamation or Winding-Up of Resident Corporation

Chapter 21 Merger or Split-Up of Foreign Corporations

Chapter 22 Liquidation and Dissolution of a Foreign Affiliate

 

Part VIII – Base-Tightening Measures

Chapter 23 Upstream Loans

Chapter 24 Foreign Affiliate Dumping Rules

Chapter 25 Pertinent Loan or Indebtedness

 

Part IX – Other Transactions and Events

Chapter 26 Acquisition of Control

Chapter 27 Immigration of Foreign Affiliate to Canada

 

Part X – Particular Entities

Chapter 28 Partnerships

Chapter 29 Fiscally Transparent Foreign Affiliates

Chapter 30 Financial Businesses, Institutions and Subsidiaries

Chapter 31 Foreign Affiliates of Resident Individuals

Chapter 32 Australian Trusts

 

Part XI – Anti-Avoidance

Chapter 33 Anti-Avoidance Rules

 

Appendix
Glossary