international tax planning - canadian tax foundation “double dipping”; 2. provide a transition...

canadian tax journal / revue fiscale canadienne (2007) vol. 55, no 3, 655 - 75

655

International Tax PlanningCo-Editors: Lincoln Schreiner* and Michael Maikawa**

The AnTI-TAx-hAven InITIATIve And The ForeIgn AFFIlIATe rules

Melanie Huynh, Eric Lockwood, and Michael Maikawa**

In the federal budget presented to the House of Commons on March 19, 2007, Finance Minister Jim Flaherty proposed to effectively eliminate the ability to deduct interest on borrowings relating to investments in foreign affiliates. In response to widespread criticism, on May 14, 2007, Minister Flaherty announced a substantially revised and more narrowly focused interest denial rule. The revised proposal, referred to as the anti-tax-haven initiative (aTHI), has as its primary objective the prevention of “double-dipping”—the generation of two (or more) interest expense deductions in respect of one investment. The authors of this article examine the mechanics of the aTHI, including its practical limitations, and explore issues concerning the future integration of the aTHI with the foreign affiliate regime and other provisions of the Income Tax act.

Keywords: Double Dip n tax havens n interest DeDuctibility n foreign affiliates n

partnerships n tower structures

C o n T e n T s

Introduction 656application of the aTHI Mechanism to Double-Dip Structures 658

Typical Structures Targeted by the aTHI 658Restriction of Deductible Interest 658Foreign Taxes Paid 660Double-Tracing Requirement 662aggregation Rule 663

Integration with the Foreign affiliate Rules 663Exempt Surplus 664Foreign Tax Deduction 665Recharacterized Income Under Paragraph 95(2)(a) 665Matching of Interest Expense and Interest Income 666Participating Percentage 667

* OfPricewaterhouseCoopersLLP,Vancouver.

** OfPricewaterhouseCoopersLLP,Toronto.

656 n canadian tax journal / revue fiscale canadienne (2007) vol. 55, no 3

InTroduCTIon

InthesecondbudgetoftheHarpergovernment,presentedtotheHouseofCom-monsonMarch19,2007,FinanceMinisterJimFlahertyproposedtoeffectivelyeliminateafundamentalfeatureoftheCanadiancorporateincometaxsystemthathasbeeninplaceforalmost35years:thedeductibilityofinterestexpenserelatingtoinvestmentsinforeignaffiliates.1Withintwomonths,heannouncedmajorchangestothatproposal.

The2007federalbudgetproposedtorestricttheabilityoftaxpayers(individualsandcorporations)todeductinterestonfundsborrowedforinvestmentintheequityordebtofaforeignaffiliate.Thiswasintendedtobeachievedthroughtheadaptationoftheexistingtracingrulesforinterest.Generally,underthecurrentlaw,interestisdeductibleprovidedthattheborrowedfundsareusedforthepurposeofearningincome,whetherfromabusinessorproperty(forexample,shares).

Underthebudgetproposal,interest“relatingto”aninvestmentinaforeignaf-filiatewouldconstituteauseofborrowedfundsthatwouldnolongersupportanimmediatededuction.Instead,such interestexpenseswouldbeaccumulated ina“disallowedinterestpool,”andwouldbedeductibletothetaxpayerinaparticularyearonlytotheextentthattheinvestmentintheforeignaffiliateresultedinanetadditiontothetaxpayer’staxableincomeforthatyear.Thereceiptofincomefromtheaffiliatethatwasnottaxable(forexample,adividendfromexemptsurplus)wouldresultinpermanentdisallowanceofanequivalentamountofinterestexpense.

Thebudgetproposalgarneredsignificantattentionandcontroversy,asthepress,taxpayers,andindustryassociationsdenounceditseffectsontheeconomicwell-being and competitiveness of Canadian corporations globally.2 Many in the taxcommunity warned that the proposal was too broad and would have significantnegative implications for Canadian companies with existing and planned globaloperations,includingincreasingthetaxcostofacquiringandfinancingthoseoper-ations,andthuserodingacompetitiveadvantagethatCanadianmultinationalshaveenjoyedforanumberofyears.

Section 17 and the aTHI 668application of the aTHI Mechanism to Tower Structures, Partnerships,

and Other Offshore Borrowing arrangements 670Tower Structures 670Partnerships 673Offshore Borrowing arrangements 674

Conclusion 675

1 Canada,DepartmentofFinance,2007Budget,BudgetPlan,March19,2007.

2 Foradetaileddiscussionofthebudgetproposal,seePricewaterhouseCoopers,“ACanadianAdvantageLost:The2007FederalProposalToRestricttheDeductibilityofInterestinFinancingForeignAffiliates,”Tax Memo,April12,2007(online:http://www.pwc.com/ca/taxmemo).

international tax planning n 657

Asaresultofthewidespreadcriticism,onMay14,2007,FinanceMinisterFlahertyannouncedsubstantialchangestothebudgetproposal.3TheFinancenewsreleasereferredtotherevisedproposalas“theAnti-Tax-HavenInitiative”(ATHI)andiden-tifiedthefollowingasitsobjectives:

1. Preventmultinationalcorporationsfromusingtaxhavensandothertaxavoid-ancestructurestogeneratetwoexpensedeductionsforonlyone investment,so-called“doubledipping”;

2. Provideatransitionperiodto2012—aftertheplannedreductionstothefederalstatutorycorporatetaxratearefullyphased-inandtheratehasbeenreducedto18.5percent;

3. UsetaxrevenuesgeneratedthroughtheAnti-Tax-HavenInitiativetofurtherreducebusinesstaxesinCanada;and

4. Appointanadvisorypanelofexpertsinthenearfuturetolookforwaystofur-ther improve the fairness and competitiveness of Canada’s international taxsystem.4

InannouncingtheATHI,theministeracknowledgedthecriticismsofthebudgetproposal,butemphasizedthegovernment’scommitmenttoensuringfairnessintheCanadiansystem.Inparticular,hemaintainedthatstructuresthatusetaxhavensandotherlow-taxjurisdictions,aswellascertainhybridentitystructuresthatseektoarbitragedifferencesbetweenCanadianandUstaxrulestoobtainthesameresultsasadouble-dip,are“inherentlyunfair.”5Thus,theATHIwouldbeimplementedtoreplace the interestrestrictionsproposedbythebudgetandwould limit interestdeductibilityinCanadaifthefundsborrowedcouldbetracedtoadebtthatearned“double-dipincome.”

ThisarticleexaminesthemechanicsoftheATHI,6itspracticallimitations,andissuesrelatingtoitsfutureintegrationwithotherrulesintheIncomeTaxAct.7Alloftheseconcernswillneedtobeaddressedinthedraftlegislation,whichisexpectedtobereleasedbeforeJanuary2008.

3 Canada,DepartmentofFinance,“Canada’sNewGovernmentImprovesTaxFairnesswithAnti-Tax-HavenInitiative,”News Release2007-041,May14,2007,andaccompanyingBackgrounder;and“NotesforRemarksbytheHonourableJimFlaherty,MinisterofFinance,totheTorontoBoardofTrade.”

4 News Release,supranote3.

5 “NotesforRemarks,”supranote3.

6 see“TechnicalDescriptionofMechanismToImplementtheAnti-Tax-HavenInitiativeToConstrainInappropriateTaxPlanningstructuresToFinanceForeignAffiliates”(hereinreferredtoas“thetechnicaldescription”),inBackgrounder,supranote3.

7 RsC1985,c.1(5thsupp.),asamended(hereinreferredtoas“theAct”).Unlessotherwisestated,statutoryreferencesinthisarticlearetotheActandregulationsmadeunderit.


APPlICATIon oF The AThI MeChAnIsM To double-dIP sTruCTures

Typic al structures Targeted by the AThIFigure1illustratesthetypeofforeignaffiliatefinancingarrangementthattheATHIidentifiesasadouble-dipfinancingstructure,andspecificallytargetsasanexampleof“inappropriate”taxplanning.

ACanadiancompany,Canco,borrowsfundsfromathirdpartyandinvestsintheequityofaforeignaffiliate,Finco,locatedinajurisdictionthathasataxtreatywithCanada.FincousesthefundstomakealoantoFA,anotherforeignaffiliateofCanco.FAcarriesonanactivebusinessandislocatedinahigh-taxjurisdictionthathasataxtreatywithCanada.TheinterestpaidtoFincobyFAisrecharacterized,underpara-graph95(2)(a)oftheAct,asincomefromanactivebusinessofFinco,8becauseitisdeductedincomputingtheactivebusinessincomeofFAthatwouldotherwisebeavailabletobepaidasatax-freedividendtoCanco.TheinterestearnedbyFinco,lessanyapplicableforeigntax(whichisassumedtobelessthanthetaxsavinginFA),isaddedtoFinco’sexemptsurplusandthereforecanbepaidasatax-freedividendtoCanco.

Overall,underthisstructure,theinterestontheloanfromFincotoFAreducesthe foreign tax that FAwouldotherwisehavepaid. It also increases theafter-taxearningsofCancoandlowersitsinvestmentcostinFA.Atthesametime,CancoisallowedacurrentdeductioninCanadafortheinterestitpaysontheinitialborrow-ingfromthebank.

restriction of deductible InterestTheATHIproposestoeliminatethe“unfair”taxadvantageofsuchfinancingstructuresbyreducingthedeductionforinterestrelatingtoinvestmentsinforeignaffiliatesbyacorporationresidentinCanadabytheamountofthecorporation’sdouble-dipin-come.Thefollowingsummaryoutlinesthekeycomponentsoftheinterestrestrictionformulaandtheirpotentialapplicationtothestructureinfigure1.

n “Interest relating to investments in foreign affiliates” includes interest onborrowedmoneyusedtoacquiresharesordebtsofaforeignaffiliate,tolendtoorcontributecapitaltoaforeignaffiliate,ortootherwiseearnincomefromaforeignaffiliate.Infigure1,theinterestexpenseontheloanobtainedbyCancofromthebankandinvestedinsharesofFincomayberestrictedundertheATHI.

n “Double-dipincome”inrespectofacorporationiscomputedasthecorpora-tion’sparticipatingpercentageof incomeattributable to a “specifieddebt”

8 Intheabsenceofparagraph95(2)(a),theinterestreceivedbyFincowouldbeforeignaccrualpropertyincome(FAPI)andthereforesubjecttoCanadianincometaxpayablebyCancoonacurrentbasis.


andrecharacterizedasactivebusinessincomeunderparagraph95(2)(a),re-duced by the amount of foreign taxes paid multiplied by the relevant taxfactor.9

n A“specifieddebt”isadebtowingtoaforeignaffiliatethataroseaspartofaseriesoftransactionsthatincluded,andcanreasonablybeconsideredtohavebeenfundedby,theindebtednessoftheCanadiancorporationthatwasusedtoinvestintheforeignaffiliate.Infigure1,theloanfromFincotoFAwillbeconsideredaspecifieddebtbecauseitisfundedbythebankloanthatCancousedtoinvestinsharesofFinco.

AssumingthattheloanfromFincoisusedinanactivebusinessofFA,theinterestreceivedbyFincowillberecharacterizedasactivebusiness incomeunderclause95(2)(a)(ii)(B).This interest, less any foreign taxes (times the relevant tax factor)paidbyFinco,willbeCanco’sdouble-dipincomeandwillreduceitseligibleinter-estexpense.

Thefollowingexampleillustratesthecalculationoftherestrictedinterestdeduc-tionunderthisformulaforasimilarfinancingstructure,showninfigure2.

Example: Restricted Interest Calculation

Asshowninfigure2,CancoborrowsCdn $100millionfromanarm’s-lengthlenderat4percentinterestandusesthefundstocapitalizeaforeignfinancingaffiliate,Finco.AssuminganexchangerateofUs $0.95toCdn$1.00,FincousesthefundstomakeaUs $95millionloanat5percentinteresttoFA,anotherforeignaffiliateofCanco.FAusesthefundsinanactivebusiness.AssumethatFincopaysincometaxatarateof10percent.

FIGURE 1 Example of a Double-Dip Financing Structure

CancoLoan

Interest

Finco FALoan

Capital

Interest

Bank

9 “Relevanttaxfactor”isdefinedinsubsection95(1).Currently,therelevanttaxfactoris3.2258(being1dividedby31percent).


UndertheATHIformula,thedouble-dipincomeofCancoiscalculatedastheinter-estearnedbyFincothatisrecharacterizedunderparagraph95(2)(a)(Us $4.75million),lessforeigntaxespaidbyFincogrossedupbytherelevanttaxfactor.Usingthecurrentrelevanttaxfactorof3.2258,Canco’sdouble-dipincomeiscalculatedasfollows:

Us $4.75m−[(Us $4.75m×0.10)×3.2258]=Us $3.22m.

Thedouble-dip incomewouldbeconvertedtoCanadiandollars,possiblyatanaveragerateofexchange.AssumingthattheCanada-Usexchangerateremainscon-stant,theallowedinterestdeductioninrespectofCancowouldbeequaltotheinterestontheCdn $100millionborrowedbyCancolessthedouble-dipincome,or

Cdn $4.00m−(Us $3.22m/0.95)=Cdn $0.61m.

ThecalculationshowsthattheallowedinterestdeductioninrespectofCancoisequaltotheamountofforeigntaxespaidbyFincolesstheinterestspreadbetweentheloanmadebyFincotoFAandthedebtowedbyCanco.

Foreign Ta xes PaidTheATHIformulaapparentlyassumesthatinteraffiliateinterestearnedonaspeci-fieddebtinahigh-taxjurisdiction(andthereforenotataxhaven)willnotgiverisetodouble-dipincometotheCanadiancorporationandtherebylimitthecorpora-tion’sinterestdeduction.However,aforeignaffiliatereceivinginterestinahigh-taxjurisdictionmaynotbesubjecttotax,ormaynotitselfpaytax,inthatjurisdictioninrespectofthatincome.

Atypicalexampleisshowninfigure3,wheretheforeignaffiliateispartofaUsconsolidatedgroup.Thefinancingaffiliate,Finco,whichlendstoanotherforeignaffiliateinthesamegroup,willnotitselfpayincometaxesunlessitisthereporting

FIGURE 2 Restricted Interest Deduction for Double-Dip Income

CancoLoan: Cdn$100m

Interest @ 4%

Finco FALoan: US$95m

Capital:Cdn$100m

Interest @ 5%

Bank


agentfortheconsolidatedgroup.Infigure3,Holdcopaysthetaxonbehalfoftheconsolidated group.10 Finco’s interest income will be included in the income oftheconsolidatedgroupandbesubjecttoUstax.Theinterestincomewillberechar-acterizedincomeforCanadiantaxpurposesandincludedinthecalculationofCanco’sdouble-dipincome,butadeductionmaynotbeavailableinrespectoftheforeigntaxespaid.Therefore,undertheformula,theCanadianinterestdeductionmaybereducedeventhoughtherecharacterizedincomeissubjecttoforeignincometaxinahigh-taxjurisdiction.

TheATHIformularefersto“foreignincometaxesthatcanreasonablybeconsid-eredtohavebeenpaidinrespectof ”recharacterizedincome.11However,theATHIdoesnotspecifywhichentityshouldpaythetaxinorderforittoqualify.Incontrast,thedefinitionof“foreignaccrualtax”(FAT)insubsection95(1)requiresthatthetaxmustbepaidbyeithertheforeignaffiliatethatearnstheFAPIoritsimmediateshare-holder;12andiftaxcompensationpaymentsaremade,regulation5907(1.3)requiresthatthecompensatorytaxmustbepaidbytheforeignaffiliatethatearnstheFAPI.Therefore,theATHImechanismmayhavetobemorespecifictorecognizetaxcom-pensationpaymentssimilartoFATinthedeductionallowedforforeigntaxespaid.

Asimilarissueariseswhen,forexample,Fincoinfigure3isaUslimitedliabilitycompany(LLC)thatisownedbyaUsC-corporation(Holdco).AssumingthatLLCisadisregardedentityforUstaxpurposes,itisHoldcothatwouldbesubjecttoandpaytaxtotheUsgovernmentinrespectofLLC’sincome.Inthiscasealso,arulesimilartotheFATprovisionisnecessarytorecognizethetaxpaidbyHoldcoasfor-eigntaxpaidwhenLLCdistributesitsincome.

Adopting theFATruleswillnotaddress foreignwithholding taxondividendspaidoutofHoldco,however.UndertheFAPIandforeignaffiliateregime,suchtaxwillbeincludedintheunderlyingforeigntax13andbeavailableforagrossed-updeductionunderparagraph113(1)(b)whenFinco’sincomeisultimatelydistributedtoCanco.UndertheATHI,assumingthatFinco’sincomeretainsitscharacterandcontinuestobeincludedinFinco’sexemptsurpluspool,aparagraph113(1)(b)de-ductionwillnotbeavailable.IfthewithholdingtaxisallowedasforeigntaxpaidforpurposesofcomputingCanco’sdouble-dipincome,amechanismintheATHIfor-mulawillbenecessarytoallowforthefactthatthewithholdingtaxmaybepaidseveralyearsaftertheyearforwhichthedouble-dipincomeisdetermined.

10 Treas.reg.section1.1502-77(a)(1)undertheInternalRevenueCodeof1986,asamended.

11 seeelementCoftheformulainparagraph3ofthetechnicaldescription,Backgrounder,supranote3.

12 ProvidedthattheshareholderisanotherforeignaffiliateofthetaxpayerandthetaxispaidinrespectofadividendreceivedthatisconsideredpaidoutoftheFAPI:seesubsection95(1),paragraph(a)(ii)ofthedefinitionof“foreignaccrualtax.”AlsoseeCanadaRevenueAgency(CRA)documentno.9830545,November25,1999.

13 Asdefinedinregulation5907(1).


double-Tr acing requirementTodeterminetheamountofinterestexpensedeniedundertheATHI,itisnecessarytoestablish

1. theamountofdebtpotentiallysubjecttointerestdeductibilityrestrictions;and

2. the amountof suchdebt that canbe linked to the earningof double-dipincome.

Debtpotentiallysubjecttointerestdeductibilityrestrictionsisdebtborrowedorincurredbyacorporation(orpartnership)thathasbeenusedtoinvestinsharesofaforeignaffiliate,tocontributetothecapitalofaforeignaffiliate,ortoinvestindebtofaforeignaffiliate.Ifnodebtcanbetracedtosuchinvestments,therewillbenointerestdeductibilityrestrictionsandthesecondtracingisunnecessary.

If debt is potentially subject to interest deductibility restrictions, the secondtracingtestisnecessarytoestablishwhetherthereisalinkbetweenthatdebtandtheearningofdouble-dipincome.AccordingtotheATHI,anyrecharacterizedin-comeofaforeignaffiliateattributabletospecifieddebtowingtoaforeignaffiliateisincludedasdouble-dipincome.Asdiscussedabove,specifieddebtisdebtthatcanreasonablybeconsideredtohavebeenfundedthroughaseriesoftransactionsbythefirstdebt.

FIGURE 3 Interaffiliate Financing Within a Consolidated Group

CancoLoan

Interest Capital

Consolidated group

Bank

Holdco

Finco FALoan

Capital

Interest


Theword“funded”impliesatracingtest,andthereferencetoaseriesoftrans-actions indicates that the tracing canbedirector indirect through anumberofcompaniesortypesofinvestments.Thechallengesthatthiswillentailwillbesimi-lartothoseidentifiedforthetracingrequirementintheoriginalbudgetproposal.14Inparticular,Canadiancompanieswithsignificantborrowingsandinvestmentsinforeignaffiliateswillfinditextremelydifficultorimpossibletocarryouttherequi-sitetracingwithoutestablishingthehistoryofinvestmentsandfinancings.Becausecorporationsgenerally treatcashas fungible, theremaynotbeclearevidencetosupporttheoriginoffundsusedtofinanceinvestmentsinforeignaffiliatesasdis-tinguishedfrominvestmentsinCanadianoperations.

ItishopedthatoneofthetasksoftheDepartmentofFinanceindraftinglegis-lationwillbetoclarifythetracingrequirementsothattaxpayerscanapplytherulesinpractice.

Aggregation ruleTheATHIincludesarelated-groupaggregationrulethatallocatesexcessdouble-dipincomeinrespectofaparticularcorporationtoanotherrelatedcorporationthathasincurredinterestexpenseondebtrelatingtoinvestmentsinforeignaffiliates.spe-cifically,thisruleapplieswhen

aparticularcorporation’sinterestrelatingtoinvestmentsinforeignaffiliatesexceedstheamountoftheparticularcorporation’sdoubledipincome,andanothercorpora-tionthatwasrelatedtotheparticularcorporation...has...doubledipincomethatexceedsitsinterestrelatingtoinvestmentsinforeignaffiliates.15

Effectively,onceadebtowingtoaforeignaffiliateisaspecifieddebt,anyborrowingbyarelatedcorporationthatisinvestedinaforeignaffiliatebecomessubjecttotheATHI.Anyexcessdouble-dipincomewillreduceanyinterestexpenseondebtin-curredbyanyrelatedcorporationthatusedsuchdebttoinvestinsharesordebtofaforeignaffiliate.Thisdebtneednotbetracedtoanydouble-dipincome.There-fore,theapplicationcouldbesobroadthat investmentsbyrelatedcompanies inotherchainsofforeignaffiliatescouldbeaffected.

InTegrATIon wITh The ForeIgn AFFIlIATe rules

Withthereference in thedouble-dip incomeformula toparagraph95(2)(a), theATHIisusingtherecharacterizationrulesasanindicatoroftaxabuse.However,theATHIbasesthismeasureonassumptionsthatarenotalwayspresentininter-affiliatefinancingarrangements.Examplesareassumptionsrelatingto(1)exemptsurplus;(2)thedeductibilityofinterestexpenseintheforeignjurisdiction;(3)re-characterizedincome;and(4)thematchingofinterestexpenseandinterestincome.

14 see,forexample,supranote2.

15 Paragraph7ofthetechnicaldescription,Backgrounder,supranote3.


A further issue is the determination of the Canadian corporation’s participatingpercentage inrespectofanaffiliate’srecharacterizedincome.Eachofthesecon-cernsisdiscussedbelow.

exempt surplusTheATHIassumesthat,inthestructureshowninfigure1,Fincoincludesthedouble-dipincomeinitsexemptsurplus.Therefore,anydividendspaidbyFincoarefromexemptsurplusandarenotsubjecttotaxinCanada.ThisassumptioniskeytotheATHI’sobjectiveoflimitingthetaxpayertooneinterestexpensedeductionforasingleinvestment.TheDepartmentofFinanceBackgrounderdescribesthetax-avoidanceissueasfollows:

TheinterestdeductioninCanadaoffsetsthegroup’sCanadian-sourceincome,whileanotherdeduction,claimedinthecountryinwhichthebusinessbeingfinancedislo-cated...sheltersthestructurefromtaxthere.TakingadvantageofanotherfeatureofCanada’srules, thegrouprecharacterizes theresulting investment incomeasactivebusinessincome,allowingittobereturnedtoCanadaasexemptsurplusdividends(andsometimespaidinturntoaforeignparentcompany).Asaresult,thegroupenjoystwodeductionsforwhatiseconomicallythesameexpense.Theextradeductionallowsittoshelterother,Canadian-sourceincomefromCanadiantax.16

TheexemptsurplusassumptiondoesnotconsidertheresultifeitherFincoorthe borrowing foreign affiliate (or both) are located in a non-designated treatycountry.Inthissituation,thedouble-dipincomewillbeincludedinFinco’staxablesurplusandwillbesubjecttotaxinCanadawhenpaidtoCancoasadividend.

TheresultundertheATHIisthatalloraportionoftheinterestexpenseinCan-adawillbenon-deductiblewhiletheincomeearnedbyFincowillbesubjecttotax.TheoriginalbudgetproposalwouldhavedeniedtheinterestonlytotheextentthatCanco’sdividendincomewasreducedbyadeductionunderparagraph113(1)(b)forunderlyingforeigntax.TheATHIdeniestheinterestdeductionwhetherornotthedividendincomepaidtoCancooutofFinco’ssurplusaccountsissubjecttotaxinCanada.

Giventhisresult,acorporationwithanotherwiserestrictedinterestdeductionwouldbebetteroffiftheinterestincomefailedtherecharacterizationtestinpara-graph95(2)(a)andwascharacterizedasFAPI.Althoughtheinterestwouldthenbeincludedinthecorporation’sincome,thedeductionofanyinterestexpensewouldnolongerberestrictedbecausetherewouldbenodouble-dipincome.TheproperresultundertheATHIshouldleavethecorporationnoworseoffthaniftheincomewereotherwiseFAPI.

16 Backgrounder,supranote3,under“InternationalTaxation:TheCanadianExperience.”


Foreign Ta x deductionAsnotedabove,theATHIintendstoallowasingleinterestdeductionforoneinvest-ment.Indoingso,itreducesordeniestheCanadianinterestdeductionbecauseitassumesthatataxdeductionisallowedintheforeignjurisdiction.

Inthestructureshowninfigure1,subparagraph95(2)(a)(ii)applieswheretheinterestpaidbytheborrowingaffiliate(FAinfigure1)isdeductedincomputingitsearningsfromanactivebusinessinthecurrentorsubsequenttaxationyear.

TheATHIassumesthatinmeetingthiscondition,theborrowingaffiliatedeductstheinterestincomputingitstaxableincomeunderforeigntaxlaw.However,sub-paragraph95(2)(a)(ii)doesnotrequirethattheinterestbedeductibleunderforeigntaxlaw,butratherthatitbedeductedincomputingearningsasdefinedinregula-tion5907(1).

Incomputingearningsfromanactivebusinessofaforeignaffiliate,thestartingpointistaxableincomecomputedundertheforeignlawofthecountryinwhichtheaffiliate is resident.17However,under that country’s tax law, interest expense in-curredbytheforeignaffiliatemaynotbedeductibleowingtothincapitalizationlimitsorotherrestrictions.

Wheretheforeignlawdeniesthededuction,regulation5907(2)( j)stillrequiresadeductionincomputingearningsfromanactivebusinessiftherehasbeenacashoutlayorexpense.Therefore,evenifthereisnoforeigntaxdeduction,subpara-graph95(2)(a)(ii)maystillapplytorecharacterizethe interest incomeas incomefromanactivebusiness.Asaresult,therewillbedouble-dipincomebutnoforeigntaxdeduction.ByvirtueoftheATHIformula,theresultingdouble-dipincomewillreduceoreliminatetheCanadianinterestdeduction,whetherornotaforeignde-ductionisallowed.

TheprecedingexampleillustrateshowtheCanadianinterestdeductionisre-ducedeventhoughthereisnoforeigndeduction.Therefore,ifthegoaloftheATHIistopreventdoubleinterestdeductionsforasingleinvestment,theinterestrestric-tionformulashouldbemodifiedtoapplyonlyifthereisadeductionintheforeignjurisdiction.

rechar acterized Income under Par agr aph 95(2)(a)Thecalculationofdouble-dipincomereferstorecharacterizedincomeunderpara-graph95(2)(a),whichpresumablywouldincludetheproposedtechnicalamendmentsinsubparagraphs95(2)(a)(i)to95(2)(a)(vi).18TheATHIassumesthatrecharacterizedincomeunderparagraph95(2)(a)willbeinterestonspecifieddebt;however,there-characterizedincomemaynotbejustinterest.

17 seethedefinitionof“earnings”inregulation5907(1).

18 Canada,DepartmentofFinance,Legislative Proposals and Draft Regulations Relating to Income Tax(Ottawa:DepartmentofFinance,February2004)(hereinreferredtoas“the2004technicalamendments”).


Considertheexampleinfigure4.FincoisresidentinEuropeanditscalculatingcurrencyistheeuro.IfFincomakesloansinanothercurrency—say,Usdollars—toarelatedUscompany,Usco,Fincowillrealizeagainorlossontherepaymentoftheloan.Iftheloansareheldonincomeaccount,19foreignexchangegainsandlosseswillbeFAPIunlessrecharacterizedunderparagraph95(2)(a).Underthe2004technicalamendments,subparagraph95(2)(a)(v)willdeemthegainorlosstobeagainorlossfromanactivebusinessiftheloanisexcludedproperty.Theloanwillbeexcludedpropertyiftheinterestontheloanisrecharacterizedundersubparagraph95(2)(a)(ii).

Inthisexample,againonthesettlementoftheloanwouldbeincludedinthecomputationofdouble-dipincomebecausethegainwouldbeconsideredtobeat-tributedtothedebtowedtoFinco.Therefore,assumingnoforeigntax,thegainwouldreducetheamountoftheinterestdeductioninCanada.

Thisresultisinappropriatebecausethereisnoforeigndeductioninrespectofthegain.Thisisanexampleofthereferencetoparagraph95(2)(a)beingtoobroadbecauseitassumesthatallrecharacterizedincomewillbefromdeductibleinterestonspecifieddebt.

Iftheforeignexchangegainorlosswereoncapitalaccount,subparagraph95(2)(a)(v)wouldnotapplybecausesuchgainorlosswouldbedeemedtobeadispositionofexcludedproperty,andthereforewouldbeexcludedinthecalculationofFAPIunderthedefinitioninsubsection95(1).WhethertheforeignexchangegainorlossisoncapitalorincomeaccountshouldnotaffectthedeductibilityofinterestbyCanco.Thissupportstheconclusionabovethatsubparagraph95(2)(a)(v)shouldnotbeap-plicableinthedouble-dipincomecalculation.

Matching of Interest expense and Interest IncomeAcorporation’sdouble-dipincomeisdeterminedinpartbyreferencetoitspartici-patingpercentageofcertainrecharacterizedincomeearnedbyaforeignaffiliateofthecorporation.TheobjectiveistomatchtheinterestexpenseincurredinCanadawiththeinterestincomeearnedoffshorethatisincludedintheforeignaffiliate’sexemptsurplusinrespectofthecorporation.However,becausetheinterestincomeisnotincludedintheforeignaffiliate’sexemptsurpluspooluntiltheendofthefor-eignaffiliate’staxationyear,complicationscouldariseiftheforeignaffiliateandthecorporationhavedifferent taxationyear-ends,orwhere thecorporation’s invest-mentintheforeignaffiliatechangesovertime.

Toillustrate,assumethatinthestructureshowninfigure2,thetaxationyearsareDecember31forCancoandOctober31forFinco.AlsoassumethatthestructureisputinplaceonJanuary1,2012andthatallthenecessaryrequirementsaremetforFinco’srecharacterizedincometobeincludedinitsexemptsurplusinrespectofCanco.

19 LoanstoUscomaybeconsideredtobeheldonincomeaccountifFincoiscarryingonalendingbusiness.


IndeterminingCanco’sdouble-dipincomeforits2012taxationyear,presum-ablyFinco’srecharacterizedincomeearnedinthecalendaryear,andnotinFinco’s2012taxationyear,wouldbe included.OtherwisetherewouldbeamismatchofFinco’sinterestincomeandCanco’sinterestexpense.However,thismethodologyassumesthatFinco’sinterestincomeearnedinthelasttwomonthsofacalendaryearwouldbeincludedinitsexemptsurplusinrespectofCancointhefollowingyear.ThismaynotbethecaseifFincoisdisposedoftoanarm’s-lengthpersoninthefollowingyearbeforeFinco’staxationyear-end.Inthatsituation,Canco’sinter-estexpenseforthelasttwomonthsoftheyearwouldbedeniedeventhoughCancowouldreceivenocorrespondingbenefit;thatis,CancowouldbeunabletoaccessFinco’sexemptsurplusbyeithermakingasubsection93(1)electionorhavingFincomakeaso-called90-daydividendpaymenttoCancobeforethedisposition.20

One possible solution would be to include in Finco’s recharacterized incomeonlytheamountthat isorwouldbeincludedin itsexemptsurplus inrespectofCanco.However,Cancomaynotbeabletomakethisdeterminationbythetimeitisrequiredtofileitstaxreturn.

Participating PercentageAnotherissuewiththeformulaforcalculatingdouble-dipincomeisthatCanco’sshareofFinco’srecharacterizedincomeisassumedtobeequaltoCanco’sparticipat-ingpercentageinrespectofthatincome.ForpurposesoftheATHI,theparticipatingpercentageistobedeterminedinthesamemannerasundertheFAPIrules.21However,

FIGURE 4 Application of Income Recharacterization Rules

CancoLoan

Interest

Finco UScoUS$ loans

Capital

Interest

Bank

20 Regulation5902(1).



itisnotclearatwhatpointCanco’sparticipatingpercentageshouldbedeterminedinrespectofaparticulartaxationyear.22

Toillustrate,assumethefactsinfigure2,asdescribedabove,andfurtherassumethatonNovember1,2012,Cancodisposesof20percentofFincotoanarm’s-lengthpersonandusestheproceedstoreduceitsbankloantoCdn $80million.

Canco’sparticipatingpercentageinFincois100percentasatOctober31,2012,Finco’syear-end,and80percentasatDecember31,2012,Canco’syear-end.IftheparticipatingpercentageforthepurposesofcomputingCanco’sdouble-dipincomeisdeterminedasatCanco’syear-end,only80percentofFinco’srecharacterizedin-comeearnedinFinco’s2012taxationyearwillapplytoreduceCanco’scorrespondinginterestexpenseonthebankloan.ThiswillresultinanunderstatementofCanco’sdouble-dipincome,because100percentoftheincomewillbeincludedinFinco’sexemptsurplusinrespectofCanco.

Thetwolastexamplesshowthat,indraftingthelegislation,itwillbeimportanttoensurethatappropriaterulesareputinplacetoproperlymatchCanco’sinterestexpensetoFinco’sinterestincomeandexemptsurplus.

seCTIon 17 And The AThI

section17containsacomplexsetofrulesthatimputesincometoCanadiancorpor-ationsasaconsequenceofcertainloansmadetonon-residents.subsection17(1)preventscorporationsresidentinCanadafromavoidingCanadiantaxbylendingtonon-residentpersonsatalowinterestrateornointerestwheretheamountowingremainsoutstandingformorethanayear.Ifsubsection17(1)applies,thecorporationresidentinCanadaisrequiredtoincludeinitsincomeimputedinterestcalculatedontheamountoftheloan.Originally,thissectionappliedonlytoloanstonon-residentsbycorporationsresidentinCanada.However,amendmentsmadetosection17in1998introducedanewversionofsubsection17(2)thatextendedtheapplicationofsection17toloansbetweennon-residents.

Ifthenon-residentsareforeignaffiliatesoftheCanadiancorporationandthereisaloanthatisaspecifieddebt,inprinciple,section17andtheATHIcouldbothapply.However,asweshallseefromthefollowingexample,asaresultoftheoperationofsection17,togetherwithaproposedamendmenttoparagraph95(2)(a)introducedwiththebudget(anddiscussedbelow),itwillprobablybeuncommonfortheATHIandtherulesofsection17toapplyconcurrentlytothesamespecifieddebt.

Forexample,supposethatCancomakesaloan(loan1)toacontrolledforeignaffili-ate,Finco,andFincousestheproceedstomakealoan(loan2)toanothercontrolledforeignaffiliate,Opco.Thisfinancingstructureisshowninfigure5.Dependingonthecircumstances,loan2couldbeaspecifieddebt.However,theATHIwouldapplyonlyifinterestincomeearnedbyFincofromloan2wereeligibleforrecharacteriza-tionpursuanttoparagraph95(2)(a).Ifthatwerethecase,loan1wouldbeexempt

22 ForFAPIpurposes,pursuanttosubsection91(1),Canco’sparticipatingpercentageisdeterminedasattheyear-endofFincothatendsinCanco’staxationyear.


fromtheapplicationofsubsection17(1)pursuanttoparagraph17(8)(a),becausetheconditionsofclause17(8)(a)(i)(B)orsubparagraph17(8)(a)(ii)wouldbemet.Further-more,loan2shouldbeexemptfromtheapplicationoftheanti-avoidanceruleinsubsection17(2)pursuanttoparagraph17(3)(a),becauseFincoandOpcoarebothcontrolledforeignaffiliatesofCanco.Intheresult,theATHIandsection17shouldnot apply concurrently when the specified debt is between controlled foreignaffiliates.

Alternatively,supposethatCancocontributestothecapitalofFinco,andFincousestheproceedstomakealoantoOpco,arelatednon-residentcorporationthatisnotaforeignaffiliateofCanco.Thisarrangementisshowninfigure6.Noneoftheexcep-tionsinsubsection17(3)wouldapplyinthiscase;therefore,subsection17(2)wouldbeoperativeand,inprinciple,Cancowouldbesubjecttoimputationundersubsec-tion17(1).However,resolution30ofthenoticeofwaysandmeansmotiontabledwiththe2007budgetwouldprecludetheinterestincomereceivedbyFincofrombe-ingrecharacterizedunderparagraph95(2)(a).23Asaresult,eveniftheloanfromFincotoOpcowereaspecifieddebt,theATHIcouldnotapplybecausetherewouldbenodouble-dipincome.Inthissituationaswell,section17andtheATHIwouldnotapplyconcurrently.

section17andtheATHIcouldbothapplytoafinancingstructuresimilartothatshowninfigure6whereOpcoisaforeignaffiliateofCancoinwhichCancohasaqualifyinginterest24butisnotacontrolledforeignaffiliate.InterestincomeearnedbyFincoontheloantoOpcowouldbeeligibleforrecharacterizationunderclause95(2)(a)(ii)(B);accordingly,theATHIcouldapplyifthatloanisaspecifieddebt.IfOpcoisalsorelatedtoCanco,section17wouldapplybecausetheexemptionsinsubsection17(3)wouldnotbeavailable.

Theaboveanomaloussituationisanexampleoftheso-calledrelated-partytrapinsection17,anissuewellknowntotaxpractitioners.25Althoughtaxpayerscouldbeexpectedtostructuretheiraffairstoavoidthispitfall,it(orotherslikeit)couldoccurinadvertently.Accordingly,theDepartmentofFinanceshouldconsiderincorporatingaruleintheATHIlegislationtopreventdouble-countingwherebothareductionofinterestexpenseandanincomeimputationcouldariseinrespectofthesamespeci-fieddebt.

23 Pursuanttoparagraph(b)ofresolution30,clause95(2)(a)(ii)(A)istoberepealedeffectivefortaxationyearsofforeignaffiliatesbeginningafter2008.seeNoticeofWaysandMeansMotionToAmendtheIncomeTaxAct,2007Budget,supranote1.

24 Aqualifyinginterestinrespectofaforeignaffiliateisdefinedinparagraph95(2)(m)andessentiallyrequiresthatCancohaveadirectorindirectinterestin(1)10percentormoreoftheissuedandoutstandingsharesofOpcothathavefullvotingrightsunderallcircumstances,and(2)sharesofOpcohavingafairmarketvalueof10percentormoreofthefairmarketvalueofalltheissuedandoutstandingsharesofOpco.

25 seeEvelynP.Moskowitz,“FinancingofNon-ResidentsandtheRecentAmendmentstosection17,”inReport of Proceedings of the Fifty-First Tax Conference,1999ConferenceReport(Toronto:CanadianTaxFoundation,2000),43:1-61,at43:50-52.


APPlICATIon oF The AThI MeChAnIsM To Tower sTruCTures, PArTnershIPs, And oTher oFFshore borrowIng ArrAngeMenTs

Tower structuresAnotherfinancingstructurespecificallytargetedbytheATHIistheuseofhybridentities,orso-calledtowerstructures,toinvestinrelatedforeignsubsidiaries.AsexplainedintheBackgrounder,

[l]ike double dips, these are chains of holding entities that are used to reduce oreliminatetaxoninvestmentsfromonecountryintoanother.Thedistinctiveaspectofatowerstructureis itsexploitationofhybridentities.Ahybridentityisonethatistreateddifferentlyunderthetaxsystemsoftwoormorecountries.26

Inparticular,thetowerfinancingstructureillustratedintheATHIemploysrelatedCanadianandUsentitiesinordertobenefitfrommismatchingtaxtreatmentinthetwocountries.Thistypeofstructurehasbeendescribedindetailinapreviousarticleinthisfeature,aswellasarticlesinotherpublications;readersshouldrefertothosearticles foradetaileddescriptionof the specificmechanics.27 Inbrief, the tower

FIGURE 5 Specified Debt: Exemption from Section 17

CancoLoan

Interest

Finco OpcoLoan 2

Loan 1

Interest

Bank

26 Backgrounder,supranote3,under“InternationalTaxation:TheCanadianExperience.”

27 see,inparticular,ElizabethJ.JohnsonandJamesR.Wilson,“FinancingForeignAffiliates:TheTermPreferredshareRulesandTowerstructures,”InternationalTaxPlanningfeature(2006)vol.54,no.3Canadian Tax Journal726-61,at729-30;andK.A.siobhanMonaghanandRajJuneja,“selectedIssuesinCross-BorderDebtFinancing,”inReport of Proceedings of the Fifty-Eighth Tax Conference,2006ConferenceReport(Toronto:CanadianTaxFoundation,2007),16:1-70.


structureusesaseriesofhybridentitiestocharacterizetheincomefromforeignin-vestmentasinterestforUstaxpurposesbutastax-freedividendsforCanadiantaxpurposes.Intheexampleshowninfigure7,thehybridentitiesarealimitedpart-nership,LP,whichownsthesharesofanunlimitedliabilitycompany,ULC,which,inturn,ownsthesharesofalimitedliabilitycompany,LLC.28

LP,formedunderUslaw,isacorporationforUstaxpurposesandsubjecttotaxintheUnitedstates,butapartnershipforCanadiantaxpurposes.ULCisincorpor-atedinCanada,29andisadisregardedentityforUstaxpurposesbutacorporationforCanadiantaxpurposes.LLCisincorporatedintheUnitedstates,andisalsoadisregardedentityforUstaxpurposesbutacorporationforCanadiantaxpurposes.

LPborrowsfromanexternallender(typicallyaUsresident).FromaCanadiantaxperspective,LPreliesontheloanmeetingtheconditionsofsubparagraph212(1)(b)(vii)toexempttheinterestpaidbyLPfromCanadianwithholdingtax.

LPcapitalizesULC,whichinturncapitalizesLLC,whichonlendsthefundstoaforeignaffiliate,FA,ofthepartnersofLP.FAusesthefundsinanactivebusiness.TheinterestreceivedbyLLCisrecharacterizedunderclause95(2)(a)(ii)(B)asin-comefromanactivebusiness.30LLCpaysexemptsurplusdividendsbacktoULC,whichthenpaysdividendstoLP.LPusesthefundstopayinterestontheexternaldebtandallocates the interestexpenseandthedividend incometo thepartners,whichdeductthedividendsundersection112.

FromaUstaxperspective,LP,ULC,andLLCconstituteasingleUstaxableentity,which receives interest income from FA but pays interest owing to the externallender.ThissingleentitywillbesubjecttoUstaxonthespreadbetweentheinterestincomeand the interestpaid.However, an interestdeduction is available to theborrowingaffiliate,FA,inrespectoftheloanfromLLC.

FIGURE 6 Specified Debt: Application of Section 17

CancoLoan

Interest

Capital

Bank

FincoOpco

(non-resident, related)

Loan

Interest

28 TheCRAconsiderstheinterestsofULC’smembersinLLCtobeshares.seeInterpretation BulletinIT-392,“MeaningoftheTerm‘share,’ ”september26,1977.

29 specifically,inAlbertaorNovascotia.

30 Usingparagraph95(2)(n)ofthe2004technicalamendmentstodeemtheborrowingforeignaffiliate(FA)tobeaforeignaffiliateofULC.


FromaCanadiantaxperspective, the investors in thetowerstructurereceivetax-freedividendspaidfromexemptsurplusandareallocatedadeductionforinter-estpaidbyLPontheexternaldebt.ThenetresultisataxdeductionforinterestintheUnitedstates,anotherdeductioninCanada,andasmallamountofUstaxontheinterestspread.

UndertheATHI,theinterestearnedbyLLCwillbeconsideredtobedouble-dipincomeinrespectofULCundertherestrictedinterestformula,assumingthatitisattributabletoaspecifieddebt.ThedebtowingtoLLCisaspecifieddebtifitisfundedbyaloaninrespectofwhichinterestispaidthatisinterestrelatingtoaninvestmentinaforeignaffiliate.Interestrelatingtoaninvestmentinaforeignaffiliateincludesborrowedmoneyusedtoacquire,directlyorindirectly,ashareofaforeignaffiliate.sincethemoneyborrowedbyLPisusedindirectlytoacquiretheLLCshares,thedebtowingtoLLCshouldbeconsideredaspecifieddebt.

However,theATHImechanismappliestorestrictthedeductibilityofacorpora-tion’sinterestexpenserelatingtoinvestmentsinforeignaffiliatestotheextentofthecorporation’sdouble-dipincome.Inthisinstance,thedouble-dipincomeisinrespectofULCwhiletheinterestexpenserelatingtotheinvestmentinaforeignaf-filiateisinrespectofthecorporatepartners,CancoandCansub.

Asdiscussedearlier,theATHImechanismincludesadeemingruletoensurethatthedouble-dipincomeinrespectofarelatedcorporation(ULC)willreducethein-terestexpenseonadebtofaparticularcorporationwheretheinterestrelatestoan

Capital

LLC FALoan

Interest

Capital

ULC

FIGURE 7 Example of a Tower Structure

Canco

Cansub

LPLoan

Interest

Bank


investmentinaforeignaffiliate.31sincetheinterestincurredbyLPandallocatedtothecorporatepartnerswouldbeconsideredinterestrelatingtoaninvestmentinaforeignaffiliate,thedouble-dipincomeinrespectofULCwouldreducetheinterestexpenseincurredbyLP.

PartnershipsParagraphs1through7oftheATHImechanism,discussedabove,addresstaxavoid-anceinrespectofadebtincurredbyacorporation.Paragraph8,thefinalprovision,extendstheapplicationoftheserulestoastructurethatemploysapartnershiptoinvestinaforeignaffiliate.specifically,itprovidesthat,“whereanon-residentcor-porationisconsideredtobeaforeignaffiliateofapartnership,theincomeofthepartnershipbedeterminedinamannerconsistentwiththerulesinparagraphs(1)to(7).”32Presumably,thisrulewouldapplyonlywherethereisaborrowingbyapartnership;otherwise,therequirementthatincomeofapartnershipbedeterminedundertherulesofparagraphs1to7wouldnotbemeaningful.Giventhisconstraint,thereareessentiallyonlytwostructuresthatcouldberelevant:onewherethemem-bersofthepartnershipareCanadiancorporationsandonewherethemembersofthepartnershipareforeignaffiliates.

The structure shown infigure8 is an exampleof thefirst type.Assume thatPartnershipusestheproceedsofabankloantoacquiresharesofFinco,andFincousesthefundstomakealoantoFA.IftheATHImechanismistoapply,theloanfromFincotoFAmustbeaspecifieddebt.Asaresultofresolution30,referredtoabove,thiswillbepossibleonlyifFAisaforeignaffiliateofPartnershipinwhichPartner-shiphasaqualifyinginterest.

Thestructureinfigure8issimilartotheexampleofatowerfinancingstructureinfigure7.Asinthatexample,theinterestonthebankloanappearstobecaughtbythedefinitionofinterestrelatingtoinvestmentsinforeignaffiliatesundertheATHI;inparticular,thebankloancouldbeconsideredtobeusedtoassistPartnership,withwhichCancodoesnotdealatarm’s length, inacquiringsharesofaforeignaffiliate.33

However,fortheATHItoapplytolimitthedeductibilityofinterest,Cancomustalsohavedouble-dipincomeinrespectofFinco.Itappearsthatthiswouldnotbepossiblewithoutparagraph8.Asnotedabove,theATHImechanismdefinesdouble-dipincomeinrespectofacorporationonly,andFinco,althoughaforeignaffiliateofPartnership,isnotaforeignaffiliateofCanco.34


32 Paragraph8ofthetechnicaldescription,ibid.

33 seeparagraph2(a)(ii)ofthetechnicaldescription,ibid.

34 ThereisnoindicationintheBackgrounderthatsection93.1willbeamendedtoapplyforthepurposesoftheATHI.


FALoan

Interest

Capital

Finco

FIGURE 8 Borrowing by a Canadian Partnership

Canco

Cansub

PartnershipLoan

Interest

Bank

WhilelittleinformationisprovidedintheBackgrounder,itappearsthatpara-graph8willbridgethisgapintherules,essentiallybytreatingPartnershipasifitwerethecorporationreferredtoinparagraphs1to7.

Figure9providesanexampleofthesecondtypeofpartnershipstructure.Itap-pearsthatparagraph8wouldapplytobringtheATHIprovisionstobear.However,inthiscase,itisnotclearwhatpolicyrationalewouldjustifyrestrictingPartnership’sdeductionforinterestonthebankloan.

offshore borrowing Arr angementsItappearsthatastructureusingaforeignaffiliatetoborrowandinvestinanotherforeignaffiliatecouldalsobesubjecttotheATHImechanism.Forexample,ifPartner-shipinfigure9wereacorporationandaforeignaffiliate,ratherthanapartnership,onthebasisofthemechanismdescribedintheBackgrounder,theinterestontheborrowingcouldbeinterestrelatingtoinvestmentinforeignaffiliatesandbesub-jecttotherestrictedinterestdeductionformula.35TheapplicationoftheATHIinthismannerinanoffshorecontextappearstobeanunintendedanomalyandshould,wehope,becorrectedinthedraftlegislation.

35 Pursuanttoparagraph95(2)(f.1),theincomeorlossofaforeignaffiliatefrompropertyistobecomputedasiftheaffiliatewerearesidentofCanada.Onewouldnormallynotconsiderthataforeignaffiliateitselfcanhaveforeignaffiliates.However,thelegislativedrafterpresumablythoughtotherwiseand,accordingly,carvedsection91outoftheapplicationofparagraph95(2)(f.1)insubparagraph(f.1)(ii).


FA 2Loan

Interest

Capital

Finco

FIGURE 9 Borrowing by a Foreign Partnership

FA 1

Canco

FA Sub

PartnershipLoan

Interest

Bank

ConClusIon

ThedraftlegislationtoimplementtheATHIrulesisexpectedtobepublishedsome-timein2007,andmaybereleasedbeforethisarticleispublished.still,theaboveexamplesillustratemanyissuesthatwillneedtobeaddressedindraftingthelegis-lation.TheexamplesshowthemanypracticallimitationsandissuesthatariseasaresultoftheintegrationrequiredbetweentheATHImechanismandotherrulesintheAct,andinparticulartheforeignaffiliaterules.Theforeignaffiliaterulesareawaitingthefinalversionoftheirowntechnicalamendments,andtherequiredin-tegrationwiththeATHIwillincreasethecomplexityofthatlegislation.Nodoubtthelongtransitionperiodproposedfortheimplementationofthenewruleswillbeneededforfurtheranalysisandrevisions.

international tax planning - canadian tax foundation “double dipping”; 2. provide a transition...

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