Explanatory Notes to the Legislative Proposals and Draft Regulations Relating to Income Tax (February 2004): 3
- Table of Contents - Previous - Next -

Part II

Foreign Affiliates

Clause 128

Amount Owing by Non-resident

ITA
17

Section 17 of the Income Tax Act provides rules dealing with the situation where a non-resident person owes an amount to a corporation resident in Canada. Subsection 17(1) generally applies where such an amount has remained outstanding for more than one year without the corporation including interest on that amount, computed at a reasonable rate, in computing its income. Where subsection 17(1) applies, it treats the corporation resident in Canada as having received interest on that amount, computed at a prescribed rate, at the end of each taxation year of the corporation during which that amount was outstanding.

Borrowed Money

ITA17(8.1) and (8.2)

Subsection 17(8) of the Act provides an exception to subsection 17(1) with respect to amounts owing by a non-resident person to a particular corporation resident in Canada where

• the non-resident person is a controlled foreign affiliate of the particular corporation, and

• the amount owing meets the test set out in either subparagraph 17(8)(a)(i) or (ii).

However, the exception afforded by subsection 17(8) is not available in circumstances where the amount owing by the controlled foreign affiliate is incurred to pay existing indebtedness of the affiliate to another person or partnership (other than the particular corporation) because the amount owing arose for the purpose of allowing the affiliate to pay the existing indebtedness rather than for a use that qualifies under subparagraph 17(8)(a)(i) or (ii). New subsections 17(8.1) and (8.2) are introduced to address this issue.

New subsection 17(8.1) provides that new subsection 17(8.2) applies in respect of money (referred to as "new borrowings") that a controlled foreign affiliate of a particular corporation resident in Canada has borrowed from the particular corporation where the affiliate has used the new borrowings

• to repay money (referred to as "previous borrowings") previously borrowed from any person or partnership, if

• to pay an amount owing (referred to as the "unpaid purchase price") by the affiliate for property previously acquired from any person or partnership, if

New subsection 17(8.2) provides that the new borrowings are, for the purpose of subsection 17(8), deemed to have been used for the purpose for which the proceeds from the previous borrowings were used or were deemed by subsection 17(8.2) to have been used, or to acquire the property in respect of which the unpaid purchase price was payable, as the case may be.

New subsections 17(8.1) and (8.2) apply to taxation years that begin after February 23, 1998.

Definition "controlled foreign affiliate"

ITA
17(15)

Subsection 17(15) of the Act contains definitions that apply to section 17. That subsection is amended by replacing the definition "controlled foreign affiliate" in subsection 17(15) to provide that "controlled foreign affiliate", at any time, of a taxpayer resident in Canada, means a corporation that would, at that time, be a controlled foreign affiliate of the taxpayer within the meaning assigned by the definition "controlled foreign affiliate" in subsection 95(1) if

- that definition were read without reference to its paragraph (a);

- subparagraph (c)(ii) of that definition read as follows:

These amendments to the definition "controlled foreign affiliate" in section 17 are consequential to the proposed new amendments to the definition "controlled foreign affiliate" in subsection 95(1). See the commentary for subsection 95(1) for details about the amendments to the definition "controlled foreign affiliate" in subsection 95(1).

This amended definition "controlled foreign affiliate" in subsection 17(15) applies to taxation years of a foreign affiliate of a taxpayer that begin after February 23, 1998. However, the following transitional rules apply for taxation years that begin after February 23, 1998 and on or before Announcement Date:

• for taxation years of a foreign affiliate of a taxpayer that begin after 2002 and on or before Announcement Date, that definition is to be read as follows:

• for taxation years of a foreign affiliate of a taxpayer that begin after February 23, 1998 and before 2003, that definition is to be read as follows:

Clause 129

Consideration for Warranties, Covenants or Other Obligations

ITA
42

Section 42 of the Act provides rules governing warranties, covenants, and other conditional or contingent obligations given by a taxpayer in respect of a disposition of properties.

Section 42 is amended to provide that an amount received or receivable by a taxpayer in a taxation year as consideration for a warranty, a covenant or another conditional or contingent obligation given or incurred by the taxpayer in respect of a property disposed of, at any time, by the taxpayer

• is, if the amount is received or becomes receivable on or before the taxpayer's filing-due date for the taxpayer's taxation year in which the taxpayer disposed of the property, to be included in computing the taxpayer's proceeds of disposition of the property, and

• is, if the amount is received or becomes receivable after that filing-due date, deemed to be a capital gain of the taxpayer from the disposition, by the taxpayer of the property, that occurs at the time when the amount is received or becomes receivable.

This section is also amended to provide that an outlay or expense paid or payable by the taxpayer in a taxation year under a warranty, covenant or another conditional or contingent obligation given or incurred by the taxpayer in respect of property disposed of, at any time, by the taxpayer

• is, if the amount is paid or becomes payable on or before the taxpayer's filing-due date for the taxpayer's taxation year in which the taxpayer disposed of the property, to be deducted in computing the taxpayer's proceeds of disposition of the property, and

• is, if the amount is paid or becomes payable after that filing-due date, deemed to be a capital loss of the taxpayer from the disposition, by the taxpayer of the property, that occurs at the time when the amount is paid or becomes payable.

This change applies to taxation years that end after Announcement Date.

 

Clause 130

Winding-up of a Corporation

ITA
88(1)(d.4)

Subsection 88(1) of the Act provides rules that apply where a subsidiary has been wound up into its parent corporation where both corporations are taxable Canadian corporations and the parent owns at least 90% of the issued shares of each class of the capital stock of the subsidiary.

Subsection 88(1) is amended by adding proposed new paragraph (d.4) effective for amalgamations that occur after Announcement Date and to windings-up that begin after Announcement Date. Taxpayers may elect to have the provision apply to all amalgamations that occur, and all windings-up that begin, after December 20, 2002.

In general terms, proposed new paragraph 88(1)(d.4) applies for the purpose of subparagraph 88(1)(d)(ii) and increases, in certain circumstances, the cost amount to the subsidiary of a share of a foreign affiliate of the subsidiary or the cost amount of a partnership interest in a partnership that holds such a share, thereby limiting the amount of a increase in cost base of a property to the parent that is the share or the interest in the partnership that might otherwise occur on an amalgamation or a winding up of the subsidiary.

New paragraph 88(1)(d.4) provides that

• if, at the time immediately before the winding-up, the subsidiary holds one or more shares of a foreign affiliate of the subsidiary, there shall be added to the cost amount, at that time, of each of those shares (referred to here as the "particular share") the amount determined by the formula

C

where

• if, at the time immediately before the winding-up, the subsidiary holds a partnership interest in a partnership (a "holding partnership") which holds one or more shares of a foreign affiliate of the subsidiary, there shall be added to the cost amount, at that time, of the subsidiary's partnership interest in the holding partnership (referred to as the "particular partnership interest"), the amount determined by the formula

F

Distributions of Property of a Foreign Affiliate

ITA
88(3)

Subsection 88(3) of the Act provides for rules that apply on the dissolution of a controlled foreign affiliate (a "disposing affiliate") of a taxpayer resident in Canada. For example, shares of a foreign affiliate of a taxpayer that are transferred to the taxpayer on the dissolution of the disposing affiliate will be considered to have been disposed of by the controlled foreign affiliate, and to have been acquired by the taxpayer, for the adjusted cost base or such greater amount as the taxpayer claims not exceeding the fair market value of the shares. Also, in general terms, the taxpayer's proceeds of disposition of the taxpayer's shares of the capital stock of the controlled foreign affiliate disposed of on the dissolution are deemed to be the amount, if any, by which the total of all amounts each of which is the cost to the taxpayer of property received by the taxpayer from the controlled foreign affiliate on the dissolution exceeds the total of all debts of the controlled foreign affiliate that were assumed or cancelled by the taxpayer on the dissolution.

In general terms, subsection 88(3) is being amended to be applicable to property received, by a taxpayer resident in Canada from a foreign affiliate of a taxpayer resident in Canada, in the following circumstances:

• on a dissolution and liquidation of the foreign affiliate,

• on a redemption of shares by the foreign affiliate,

• as payment of a dividend by the foreign affiliate, or

• as a distribution of property by the foreign affiliate.

This amendment applies to property received after Announcement Date.

Proposed subsection 88(3) provides for the following rules if, at any time (referred to in this commentary as the "distribution time"), a taxpayer resident in Canada receives, in the circumstances described above, a property from a foreign affiliate of the taxpayer (the property received and the foreign affiliate from which the property was received being referred to in this subsection as the "distributed property" and the "disposing foreign affiliate", respectively):

• If the distributed property was, immediately before the distribution time, a share of the capital stock of another foreign affiliate of the taxpayer and an excluded property of the disposing foreign affiliate,

• If the distributed property is not, immediately before the distribution time, both a share of the capital stock of another foreign affiliate of the taxpayer and an excluded property of the disposing foreign affiliate,

• If the taxpayer disposed of shares of the capital stock of the disposing foreign affiliate on the dissolution and liquidation of the disposing foreign affiliate or on the redemption, acquisition or cancellation of shares of the disposing foreign affiliate, as the case may be, the taxpayer's proceeds of disposition of the shares are deemed to be the amount determined by the formula

• If the taxpayer has received distributed property as a dividend or a distribution of property, the amount of the dividend paid by the disposing foreign affiliate or the amount of the distribution of property made by the disposing foreign affiliate to the taxpayer, as case may be, is deemed to be the amount determined by the formula

• The amount of a distribution of property made, at the distribution time, by the disposing foreign affiliate to the taxpayer, is to be deducted in computing the taxpayer's adjusted cost base of a particular share of the capital stock of the disposing foreign affiliate held by the taxpayer, at that time, to the extent that it is reasonable to consider the distribution as a payment made by the disposing foreign affiliate to the taxpayer as

• The amount of a distribution of property made, at the distribution time, by the disposing foreign affiliate to the taxpayer is to be included in computing the taxpayer's income as income from property that is the shares of the capital stock of disposing foreign affiliate held at that time by the taxpayer, to the extent that it is not deducted in computing the adjusted cost base of a particular share of the capital stock of the disposing foreign affiliate held by the taxpayer.

 

Clause 131

Adjusted Cost Base of Share of Foreign Affiliate

ITA
92

Section 92 of the Act provides for adjustments to be made to the adjusted cost base of a share in a foreign affiliate of a taxpayer resident in Canada.

Where Subsection 92(1.3) Applies

ITA
92(1.1)

New subsection 92(1.1) of the Act provides that new subsection 92(1.3) of the Act will apply to the holder of a share of a foreign affiliate of a corporation resident in Canada in computing at any time the adjusted cost base of the share if there is a "specified section 93 election" related to the share. Subsection 92(1.1) defines that share as the "relevant share", and defines such a time as the "computation time", for the purposes of subsections 92(1.2) and (1.3). Also, subsection 92(1.1) defines that foreign affiliate as the "relevant foreign affiliate", for the purpose of subsection 92(1.2).

For information regarding the coming-into-force of this subsection, refer to the commentary regarding new subsection 92(1.4).

Specified Section 93 Election

ITA
92(1.2)

New subsection 92(1.2) of the Act establishes, for the purposes of subsections 92(1.1) and (1.3), whether an election made under subsection 93(1) or (1.2) by a particular corporation resident in Canada in respect of a share of a particular foreign affiliate of the particular corporation that is disposed of at a time before the computation time is, at the computation time, a "specified section 93 election" related to the relevant share. The time of that disposition is referred to in subsection 92(1.2) as the "election time".

Such an election is, at the computation time, a "specified section 93 election" related to the relevant share for the purposes of subsections 92(1.1) and (1.3) if

• the particular foreign affiliate has, at the election time, an equity percentage in the relevant foreign affiliate;

• the relevant foreign affiliate was, at the election time, a foreign affiliate of the particular corporation;

• throughout the period that begins at the election time and ends at the computation time;

• the relevant share was, at the election time, excluded property of the holder (or would at that time have been excluded property of the holder if the holder had been a foreign affiliate of the particular corporation); and

• the relevant share is, at the computation time, excluded property of the holder (or would at that time have been excluded property of the holder if the holder had been a foreign affiliate of the particular corporation or of a corporation resident in Canada that is related to the particular corporation).

For information regarding the coming-into-force of this subsection, refer to the commentary regarding new subsection 92(1.4).

Adjustments to Adjusted Cost Base

ITA
92(1.3)

New subsection 92(1.3) of the Act contains rules that require adjustments to the adjusted cost base to the holder of the "relevant share". See the commentary to new subsection 92(1.1) for information regarding the circumstances that make subsection 92(1.3) apply. The adjustments are for the purposes described in subsection 92(1.4).

Under the rules contained in subsection 92(1.3), there is to be added to, or deducted from, as the case may be, the adjusted cost base to the holder of the relevant share the amount prescribed in new section 5911 of the Income Tax Regulations in respect of the specified section 93 election related to the relevant share.

For information regarding the coming-into-force of this subsection, refer to the commentary regarding new subsection 92(1.4).

Applicability of Subsection 92(1.3)

ITA
92(1.4)

New subsection 92(1.4) of the Act sets out the purposes for which the adjustments described in new subsection 92(1.3) are applicable.

Those purposes are

• the computation of the exempt surplus or deficit, the taxable surplus or deficit, and the underlying foreign tax, of the holder, in respect of the corporation resident in Canada, or in respect of any other person referred to in subparagraphs 95(2)(f)(iv) to (vii) on the assumption that the taxpayer referred to in those subparagraphs were the particular corporation resident in Canada, and

• the application of paragraphs 95(2)(c.1) to (e.6), at any time after the time of the election.

Coming-into-Force

New subsections 92(1.1) to (1.4) apply in respect of elections made under subsection 93(1) or (1.2) in respect of dispositions that occur after December 20, 2002.

However, new subsections 92(1.1) to (1.4) will not apply in respect of elections made under subsection 93(1) or (1.2) in respect of a disposition by a vendor of a share if one of the following conditions are met:

• the disposition was required to be made under an agreement in writing made by the vendor on or before December 20, 2002,

• the disposition occurs on or before Announcement Date and either

• the disposition occurs after Announcement Date and that disposition is required to be made under an agreement in writing made by the vendor on or before Announcement Date, and none of paragraphs 88(3)(a), 95(2)(c.2) and 95(2)(d) to (e.5) of the Act applies to the disposition.

For information about the aforementioned election and the aforementioned modified version of subsections 93(1.4) to (1.6), refer to the commentary to new paragraphs 95(2)(c.1) to (c.6).

 

Clause 132

Disposition of Shares of Foreign Affiliate

ITA
93

Section 93 of the Act contains a number of rules relating to the disposition of shares of the capital stock of a foreign affiliate of a corporation resident in Canada.

Election re Disposition of Share in Foreign Affiliate

ITA
93(1)

Subsection 93(1) of the Act permits a corporation resident in Canada that disposes of a share of a foreign affiliate of the corporation to elect to receive the proceeds of disposition of the share as a dividend on the share rather than as proceeds of disposition of the share.

ITA
93(1)(a)

Paragraph 93(1)(a) of the Act provides that the amount elected in respect of the proceeds of disposition cannot exceed the proceeds of disposition of the share otherwise determined and that the amount elected is deemed to be a dividend received on the share and is deemed not to be proceeds of disposition. The amendments to subparagraph 93(1)(a) provide that the amount elected in respect of the proceeds of disposition of the share cannot exceed those proceeds of disposition otherwise determined, nor exceed the amount prescribed, under proposed new subsection 5902(6) of the Regulations, in respect of the share being disposed of.

Refer to the coming-into-force commentary below to determine the coming-into-force dates for these amendments.

Deemed Election

ITA
93(1.1)

Subsection 93(1.1) of the Act provides that the rules in subsection 93(1) will automatically apply in respect of a disposition of a share of a foreign affiliate of a corporation resident in Canada by another foreign affiliate of the corporation, without the need for an election, where the share disposed of was "excluded property" (as defined in subsection 95(1)) of the vendor (other than a disposition, of a share that is excluded property, to which paragraph 95(2)(c), (d) or (e) applies). The amount of the deemed election in respect of the proceeds of disposition of the share is determined by the Regulations but will not in any event exceed the vendor's capital gain otherwise determined in respect of the disposition.

Subsection 93(1.1) is amended

• to remove the requirement that the shares be excluded property of the foreign affiliate of the corporation resident in Canada that disposed of the share, and

• to remove the rule that made the deemed election apply in respect of a disposition, of a share that is an excluded property, to which paragraph 95(2)(c), (d) or (e) applies. (Such a rule is no longer needed, as the excluded property requirement has been removed altogether.)

Refer to the coming-into-force commentary below to determine the coming-into-force dates for these amendments

Disposition of a Share of a Foreign Affiliate Held by a Partnership

ITA
93(1.2)

Subsection 93(1.2) of the Act provides that, where a particular corporation resident in Canada or a foreign affiliate of the particular corporation (each of which is referred to as the "disposing corporation") would, but for that subsection, have a taxable capital gain from a disposition by the partnership of a particular share of a class of the capital stock of a foreign affiliate of the corporation, and the disposing corporation elects in prescribed manner in respect of the gain, the amount designated in the election will reduce the taxable capital gain and will be grossed-up and treated as a dividend received on the particular share by the disposing corporation.

Subsection 93(1.2) is being amended in the following ways:

• The preamble of that section is amended to add a requirement that the election in respect of the disposition be filed "within the prescribed time".

• Subparagraph (a)(i) of that section is amended to provide that the amount designated by the corporation in the election cannot exceed the lesser of two amounts.

• The first amount is the amount determined by the following formula

• the second amount is the amount prescribed in respect of the share (see new Regulation 5902(7)).

Refer to the coming-into-force commentary below to determine the coming-into-force dates for these amendments.

No Election

ITA
93(1.4)

New subsection 93(1.4) of the Act provides that, notwithstanding subsections 93(1) to (1.3), no election may be made under subsection 93(1) or (1.2) by a corporation in respect of a disposition of a share of the capital stock of a foreign affiliate of the corporation if any of paragraph 88(3)(a) and subparagraphs 95(2)(d)(i), (d.1)(i), (e)(i), (e.1)(i), (e.2)(i), (e.3)(i), (e.4)(i) and (e.5)(i) applies to the disposition.

Refer to the coming-into-force commentary below to determine the coming-into-force dates for this new subsection.

Coming-into-Force (ITA 93(1)(a), 93(1.1), 93(1.2), (1.3) and (1.4))

The amendments to paragraph 93(1)(a), to subsection 93(1.1) and to subparagraph 93(1.2)(a)(i) apply to dispositions that occur after December 20, 2002.

However, those amendments will not apply in respect of dispositions by a vendor if one of the following conditions are met:

• the disposition is required to be made under an agreement in writing made by the vendor on or before December 20, 2002,

For information about the aforementioned election and the aforementioned modified version of subsections 93(1.4) to (1.6), refer to the commentary to new paragraphs 95(2)(c.1) to (c.6).

The amendment to the preamble of subsection 93(1.2) applies to dispositions that occur after November 1999.

New subsection 93(1.4) applies to dispositions that occur after Announcement Date.

Loss Limitation on Disposition of Share

ITA
93(2)

Subsection 93(2) of the Act provides rules for the purpose of determining the loss of a corporation resident in Canada from the disposition of a share of a foreign affiliate of the corporation or the loss of a foreign affiliate of the corporation from a disposition of a share of the capital stock of another foreign affiliate of the corporation that is not excluded property to the foreign affiliate that disposed of the share.

The amount of the loss, determined without reference to this subsection, is reduced by exempt dividends received, on the share or a share for which the share was substituted, by the corporation resident in Canada, by another corporation resident in Canada that is related to the corporation or by a foreign affiliate of either of those corporations resident in Canada (to the extent that the exempt dividends have not already reduced losses or allowable capital losses of those corporations or foreign affiliates under subsection 93(2), (2.1), (2.2) or (2.3) of the Act). The term "exempt dividend" is defined in subsection 93(3) of the Act.

Subsection 93(2) of the Act is being amended to permit the corporation resident in Canada or its foreign affiliate to restore a loss from a disposition of a share of the capital stock of a foreign affiliate of the corporation resident in Canada to the extent of the lesser of two amounts.

• The first amount is the reduction of that loss which is attributable to exempt dividends.

• The second amount is the total of the following gains determined in respect of the corporation resident in Canada or the foreign affiliate, as the case may be, that disposed of the share:

First, the formula in subsection 93(2) is amended by adding the new variable "D" and will read as follows:

Second, the addition to the loss under new variable "D" will be determined as the lesser of

• The reduction of the loss in respect of exempt dividends (determined as (B - C) in the formula), and

• The total of the following amounts determined in respect of the corporation resident in Canada or the foreign affiliate of the corporation resident in Canada, as the case may be:

• the amount of the capital gain determined under paragraph 39(2)(a) for the taxation year that includes that time in respect of

• the amount of any gain realized by the corporation resident in Canada or by the foreign affiliate of the corporation resident in Canada, as the case may be, under an agreement that provides for the purchase, sale or exchange of currency, or from the disposition of a currency, which agreement or currency, as the case may be, can reasonably be considered to have been entered into or acquired, by the corporation resident in Canada or by the foreign affiliate resident in Canada, as the case may be, for the principal purpose of hedging the foreign exchange exposure arising in connection with the acquisition of the affiliate share.

Refer to the coming-into-force commentary below to determine the coming-into-force for this new subsection.

Loss Limitation - Disposition of Partnership Interest

ITA
93(2.1)

Subsection 93(2.1) of the Act provides rules for the purpose of determining the allowable capital loss of a corporation resident in Canada from the disposition by a partnership of a share of the capital stock of a foreign affiliate of the corporation and for the purpose of determining the allowable capital loss of a foreign affiliate of a corporation resident in Canada from a disposition by a partnership of a share of the capital stock of another foreign affiliate of the corporation that would not be excluded property of the foreign affiliate if the foreign affiliate owned the share immediately before it was disposed of.

The amount of the allowable capital loss otherwise determined is reduced by ½ of the exempt dividends received, on the share or a share for which the share was substituted, by the corporation resident in Canada, by another corporation resident in Canada that is related to the corporation resident in Canada, or by a foreign affiliate of either of those corporations resident in Canada (to the extent that the exempt dividends have not already reduced losses or allowable capital losses of those corporations or foreign affiliates under subsection 93(2), (2.1), (2.2) or (2.3) of the Act). The term "exempt dividend" is defined in subsection 93(3) of the Act.

Subsection 93(2.1) is being amended to permit the corporation resident in Canada or its foreign affiliate to restore an allowable capital loss from a disposition by a partnership of a share of the capital stock of a foreign affiliate of the corporation resident in Canada to the extent of the lesser of two amounts.

The addition to the loss under new variable "D" will be determined as the lesser of

• The first amount is the reduction of that allowable capital loss which is attributable to exempt dividends.

• The second amount is ½ of the total of the following gains determined in respect of the corporation resident in Canada or the foreign affiliate, as the case may be,

First, the formula in subsection 93(2.1) is amended by adding the new variable "D" and will read as follows:

Second, the addition to the allowable capital loss under new variable "D" will be determined as the lesser of:

• The reduction of the allowable capital loss in respect of exempt dividends (determined as (B - C) in the formula), and

• ½ of the total of the following amounts determined in respect of the corporation resident in Canada or the foreign affiliate of the corporation resident in Canada, as the case may be,

• the amount of any gain realized by the partnership (to the extent that the gain is reasonably attributable to the corporation resident in Canada or to the foreign affiliate of the corporation resident in Canada, as the case may be), by the corporation resident in Canada or by the foreign affiliate of the corporation resident in Canada, as the case may be, under an agreement that provides for the purchase, sale or exchange of currency, or from the disposition of a currency, which agreement or currency, as the case may be, can reasonably be considered to have been entered into or acquired, by the partnership, by the corporation resident in Canada or by the foreign affiliate of the corporation resident in Canada, as the case may be, for the principal purpose of hedging the foreign exchange exposure arising in connection with the acquisition of the affiliate share.

Refer to the coming-into-force commentary below to determine the coming-into-force for this new subsection.

Loss Limitation - Disposition of Partnership Interest

ITA
93(2.2)

Subsection 93(2.2) of the Act provides rules for the purpose of determining the loss of a corporation resident in Canada from the disposition of an interest in a partnership that holds interests in shares of the capital stock of a foreign affiliate of the corporation resident in Canada or the loss of a foreign affiliate of the corporation from a disposition of an interest in a partnership that holds interests in shares of the capital stock of another foreign affiliate of the corporation that would not be excluded property of the foreign affiliate if the foreign affiliate owned the share immediately before it was disposed of.

The amount of the loss otherwise determined is reduced by exempt dividends received on the shares, or shares for which the shares were substituted, by the corporation resident in Canada, by another corporation resident in Canada that is related to the corporation, or a by foreign affiliate of either of those corporations resident in Canada (to the extent that the exempt dividends have not already reduced losses or allowable capital losses of those corporations or foreign affiliates under subsection 93(2), (2.1), (2.2) or (2.3) of the Act). The term "exempt dividend" is defined in subsection 93(3) of the Act.

Subsection 93(2.2) is being amended to permit the corporation resident in Canada or its foreign affiliate to restore a loss arising on the disposition of an interest in a partnership that holds interests in shares of the capital stock of a foreign affiliate of the corporation resident in Canada to the extent of the lesser of two amounts.

• The first amount is the reduction of the loss attributable to exempt dividends.

• The second amount is the sum of the following gains determined in respect of the corporation or the foreign affiliate, as the case may be, that disposed of the partnership interest

First, the formula in subsection 93(2.2) is being amended by adding the new variable "D" and will read as follows:

Second, the addition to the loss under new variable "D" will be determined as the lesser of

• The reduction of the loss in respect of exempt dividends (determined as (B - C) in the formula), and

• The total of the following amounts determined in respect of the corporation resident in Canada or the foreign affiliate of the corporation resident in Canada, as the case may be,

Refer to the coming-into-force commentary below to determine the coming-into-force dates for this new subsection.

Loss Limitation - Disposition of Partnership Interest

ITA
93(2.3)

Subsection 93(2.3) of the Act provides rules for the purpose of determining the allowable capital loss of a corporation resident in Canada from the disposition by a partnership of an interest in another partnership that has interests in shares of the capital stock of a foreign affiliate of the corporation resident in Canada and for determining the allowable capital loss of a foreign affiliate of the corporation resident in Canada from a disposition by a partnership of an interest in another partnership that has interests in shares of the capital stock of another foreign affiliate of the corporation resident in Canada that would not be excluded property if the shares were owned by the foreign affiliate.

The amount of the allowable capital loss otherwise determined is reduced by ½ of the exempt dividends received, on the share or a share for which the share was substituted, by the corporation resident in Canada, by another corporation resident in Canada that is related to the corporation, or by a foreign affiliate of either of those corporations resident in Canada (to the extent that the exempt dividends have not already reduced losses or allowable capital losses of those corporations or foreign affiliates under subsection 93(2), (2.1), (2.2) or (2.3) of the Act). The term "exempt dividend" is defined in subsection 93(3) of the Act.

Subsection 93(2.3) is being amended to permit the corporation resident in Canada or its foreign affiliate to restore an allowable capital loss from a disposition by a partnership of an interest in another partnership that has interests in shares of the capital stock of a foreign affiliate of the corporation resident in Canada to the extent of the lesser of two amounts.

• The first amount is the reduction of the allowable capital loss attributable to exempt dividends.

• The second amount is one-half of the total of the following gains determined in respect of the corporation resident in Canada or the foreign affiliate, as the case may be,

First, the formula in subsection 93(2.3) is being amended by adding the new variable "D" and will read as follows:

Second, the addition to the allowable capital loss under new variable "D" will be determined as the lesser of:

• The reduction of the allowable capital loss in respect of exempt dividends (determined as (B - C) in the formula), and

• ½ of the total of the following amounts determined in respect of the corporation resident in Canada or the foreign affiliate of the corporation resident in Canada, as the case may be,

Refer to the coming-into-force commentary below to determine the coming-into-force for this new subsection.

Coming-into-Force (ITA 93(2), 93(2.1), 93(2.2) and 93(2.3))

The amendments to subsections 93(2), 93(2.1), 93(2.2) and (2.3) of the Act apply to taxation years, of foreign affiliates of a taxpayer, that begin after Announcement Date. However, if the taxpayer so elects in writing and files that election with the Minister of National Revenue on or before the taxpayer's filing-due date for the taxation year in which these amendments are assented to, the amendments will apply taxation years of the taxpayer and all foreign affiliates of the taxpayer that begin after 1994.

 

Clause 133

Foreign Affiliates

ITA
95

Section 95 of the Act defines a number of terms and provides rules relating to the taxation of resident shareholders of foreign affiliates.

Global Section 95 Election

In this set of proposals, there are a number of amendments to section 95 of the Act, and to section 5907 of the Regulations, that apply to taxation years, of a foreign affiliate of a taxpayer, that begin or end after various specified dates. However, where a taxpayer so elects in writing and files the election (referred to in this commentary as the "Global Section 95 Election") with the Minister of National Revenue before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day on which these amendments are assented to, all of those measures apply to taxation years of all foreign affiliates, of the taxpayer, that begin after 1994. This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take the election into account.

Note that the Fresh Start Section 95 Election (described below) and the Global Section 95 Election are separate elections. As well, it should be noted that various important amendments to section 95 of the Act have separate elections that can be made by taxpayers.

The following amendments to the Act and to the Regulations are covered by the Global Section 95 Election package:

(A) Amendments to the Act:

(B) Amendments to the Regulations:

If a Global Section 95 Election is made by a taxpayer, the amendments to the definitions "exempt earnings" and "exempt loss" in Regulation 5907(1) that implement the new concept of "qualifying member" will apply only for foreign affiliate taxation years that end after 1999. For more detail, see the commentary to the definitions "exempt earnings" and "exempt loss" in Regulation 5907(1).

Note that this set of proposals provides for the possibility of a total revocation of the Global Section 95 Election. If a taxpayer has made what would otherwise be a valid Global Section 95 Election, and the taxpayer has, on or before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day that is the third anniversary of the day on which the amending legislation enacting this set of proposals is assented to, filed with the Minister of National Revenue a notice in writing to revoke the election, the election is deemed never to have been made. This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take the revocation into account.

Fresh Start Section 95 Election

This set of proposals contains a number of amendments to section 95 of the Act, and to section 5907 of the Regulations, that apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. However, where a taxpayer so elects in writing and files the election (referred to in this commentary as the "Fresh Start Section 95 Election") with the Minister of National Revenue before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day on which these amendments are assented to, all of those amendments apply to taxation years of all foreign affiliates, of the taxpayer, that begin after 1994. This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take the election into account.

Note that the Global Section 95 Election and the Fresh Start Section 95 Election are separate elections.

The following amendments to the Act and to the Regulations are covered by the Fresh Start Section 95 Election package:

- the definition "taxable Canadian business" in subsection 95(1),

- paragraphs 95(2)(j.1) and (j.2) and 95(2)(k), (k.1) and (k.4) to (k.7), and

- subsections 5907(2.9) and (2.91) of the Regulations.

See the commentary to paragraph 95(2)(k) for additional information with respect to transitional provisions.

Note that this set of proposals provides for the possibility of a total revocation of the Fresh Start Section 95 Election. If a taxpayer has made what would otherwise be a valid Fresh Start Section 95 Election, and the taxpayer has, on or before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day that is the third anniversary of the day on which the amending legislation enacting this set of proposals is assented to, filed with the Minister of National Revenue a notice in writing to revoke the election, the election is deemed never to have been made. This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take the revocation into account.

Definitions

ITA
95(1)

Subsection 95(1) of the Act defines a number of terms for the purposes of subdivision i of Division B of Part I of the Act that are used in connection with the rules dealing with the taxation of resident shareholders of foreign affiliates.

"controlled foreign affiliate"

In subsection 95(1) of the Act, a "controlled foreign affiliate", at any time, of a taxpayer is defined to mean a foreign affiliate of the taxpayer that is, at that time, controlled by

• the taxpayer,

• the taxpayer and not more than four other persons resident in Canada,

• not more than four persons resident in Canada, other than the taxpayer,

• a person or persons with whom the taxpayer does not deal at arm's length, or

• the taxpayer and a person or persons with whom the taxpayer does not deal at arm's length.

The definition "controlled foreign affiliate" is amended to provide that a "controlled foreign affiliate", at any time, of a taxpayer resident in Canada means a foreign affiliate of the taxpayer at that time that

• is, at that time, a controlled foreign affiliate of the taxpayer because of proposed new paragraph 94.1(2)(h) of the Act,

• is, at that time, controlled by the taxpayer,

• would, at that time, be controlled by the taxpayer if the taxpayer owned each share of the capital stock of the foreign affiliate that is owned, at that time, by

For information about proposed new paragraph 94.1(2)(h) of the Act, see the October 30, 2003 legislative proposals released by the Department of Finance dealing with non-resident trusts and foreign investment entities.

With respect to applying the definition "controlled foreign affiliate", note the rules in proposed new paragraphs 95(2)(u) to (x). For more detail, see the commentaries for those paragraphs.

The new definition of "controlled foreign affiliate" applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1995. However, for taxation years, of a foreign affiliate of a taxpayer that begin after 2002 and on or before Announcement Date, the term "controlled foreign affiliate" would be defined as described below:

"controlled foreign affiliate", at any time, of a taxpayer resident in Canada means a foreign affiliate of the taxpayer that

• is, at that time, a controlled foreign affiliate of the taxpayer because of proposed new paragraph 94.1(2)(h),

• is, at that time, controlled by the taxpayer, or

• would, at that time, be controlled by the taxpayer if the taxpayer owned each share of the capital stock of the foreign affiliate that is owned, at that time, by

For taxation years, of a foreign affiliate of a taxpayer that begin after 1995 and before 2003, the term "controlled foreign affiliate" would be defined as described below:

"controlled foreign affiliate", at any time, of a taxpayer resident in Canada means a foreign affiliate of the taxpayer that

• is, at that time, controlled by the taxpayer, or

• would, at that time, be controlled by the taxpayer if the taxpayer owned each share of the capital stock of the foreign affiliate that is owned, at that time, by

"entity"

The new definition "entity" in subsection 95(1) of the Act is relevant for proposed new subsection 95(3.6). An entity is defined as including an association, a corporation, a fund, a natural person, a joint venture, an organization, a partnership, a syndicate and a trust.

This new definition applies in respect of taxation years, of a foreign affiliate of a taxpayer, that end on or after December 20, 2002.

"excluded property"

The definition "excluded property" in subsection 95(1) of the Act is relevant for the purposes of computing the foreign accrual property income (FAPI) and the tax surpluses and deficits of a foreign affiliate of a taxpayer. Under the definition "foreign accrual property income" in subsection 95(1), capital gains and losses from the disposition of excluded property are disregarded in computing FAPI except in the circumstances set out in the description of B in the definition of FAPI.

Paragraph (a) of the definition "excluded property" provides that any property used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business is excluded property under that definition. Paragraph (a) of the definition is amended to clarify that property does not meet the requirements of that paragraph unless the property is used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business that is carried on by it.

Paragraph (b) of the definition "excluded property" provides that shares owned by a foreign affiliate of a taxpayer in the capital stock of another foreign affiliate of the taxpayer are excluded property if all or substantially all of the property of the other foreign affiliate is excluded property. Paragraph (b) of the definition is amended to clarify that shares owned by a foreign affiliate of a taxpayer in the capital stock of another foreign affiliate of the taxpayer do not meet the requirements of that paragraph unless all or substantially all of the fair market value of the property of the other foreign affiliate is attributable to property of that other foreign affiliate that is excluded property.

Paragraph (c) of the definition "excluded property" provides that an amount receivable is excluded property of a foreign affiliate of a taxpayer if the interest on the amount receivable is, or would be if interest were payable on it, income from an active business because of subparagraph 95(2)(a)(ii) of the Act. Paragraph (c) of the definition is amended to broaden the meaning of "excluded property" to include property all or substantially all of the income from which would be income from an active business including income that would be deemed to be income from an active business by amended paragraph 95(2)(a) if that paragraph were read without reference to subparagraph (v). For additional information, see the commentary to paragraph 95(2)(a).

New paragraph (c.1) is added to the definition "excluded property" to include property arising under or as a result of an agreement that

• provides for the purchase, sale or exchange of currency, and

• can reasonably be considered to have been made by a foreign affiliate of a taxpayer to reduce the affiliate's risk, with respect to an amount that was receivable under an agreement that relates to the sale of excluded property or with respect to an amount that was receivable and was a property described in amended paragraph (c) of the definition, of fluctuations in the value of the currency in which the amount receivable was denominated.

New paragraph (c.1) of the definition "excluded property" will, for example, address a situation where the affiliate enters into an agreement (the "sale agreement"), relating to the sale of excluded property, in which the amount receivable under the sale agreement is denominated in a currency other than the affiliate's calculating currency, and then, in order to reduce the affiliate's risk of fluctuations in the value of the currency in which the amount receivable under the sale agreement is denominated, enters into a currency hedging agreement with respect to all or a portion of that amount receivable. In such a situation, new paragraph (c.1) ensures that the income or loss from that hedge receives the same income characterization as the income or loss from the property being hedged; i.e., the income or loss from that hedge is considered to be income or loss from the sale of excluded property.

New paragraphs (a), (c) and (c.1) of the definition "excluded property" apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. Those paragraphs are part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

New paragraph (b) of the definition "excluded property" applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002.

"foreign accrual property income"

The definition "foreign accrual property income" in subsection 95(1) of the Act is relevant for the purposes of section 91 of the Act and for the purposes of computing the tax surpluses and deficits of the foreign affiliate of a taxpayer. Section 91 of the Act provides rules for determining amounts that a taxpayer resident in Canada is to include in computing that taxpayer's income for a particular year as income from a share of a controlled foreign affiliate of that taxpayer.

First, the description of B in the definition "foreign accrual property income" in subsection 95(1) is amended to include income (other than income included in the description of A in the definition "foreign accrual property income") and capital gains, as the case may be,

• from dispositions of excluded property where any of paragraphs 88(3)(a) and 95(2)(c), (c.2), (d), (d.1), (e), (e.1), (e.3) to (e.5) and (f.4) of the Act applies in respect of the disposition and, and

• gains arising under subsection 40(3) in respect of a share because of a dividend referred to in subparagraph 95(2)(e.3)(iv) or (e.4)(v) on the share,

which income or capital gain can reasonably be considered to have accrued after the affiliate's 1975 taxation year.

Second, the description of E in the definition of "foreign accrual property income" is amended to remove the reference to dispositions of excluded property to which none of paragraphs 95(2)(c), (d) or (e) apply, and replace it with a reference to dispositions of excluded property.

These amendments apply to taxation years, of a foreign affiliate of a taxpayer, that end on or after December 20, 2002.

"investment business"

The definition "investment business" in subsection 95(1) of the Act is relevant for the purposes of the definitions "income from property" and "foreign accrual property income" in that subsection.

nder the definition "investment business", the investment business of a foreign affiliate of a taxpayer means, in general, a business carried on by the affiliate the principal purpose of which is to derive income from property, income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the disposition of investment property, unless it is established that the business meets the requirements of paragraphs (a) and (b) of that definition.

Paragraph (a) of the definition "investment business" requires that the affiliate conduct the business principally with arm's length persons and that the business be either

• carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated in the country in which the business is principally carried on (subparagraph (a)(i) of the definition), or

• the development of real estate for sale, the lending of money, the leasing or licensing of property or the insurance or reinsurance of risks (subparagraph (a)(ii) of the definition).

In general terms, paragraph (b) of the definition requires that the affiliate or (as described in the preamble to paragraph (b) of the definition, where the affiliate carries on the business as a member of a partnership (except where the affiliate is a "specified member" of the partnership)), the partnership

• employs more than 5 employees full time in the active conduct of the business (subparagraph (b)(i) of the definition), or

• employs the equivalent of more than 5 employees in the active conduct of the business, taking into account only services provided by the employees of the affiliate and services provided outside Canada by employees of

The definition "investment business" is amended in the following ways.

First, subparagraph (a)(i) of definition is amended to refer to a business carried on by a foreign affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated under the laws

• of each country in which the business is carried on through a permanent establishment (the definition, in proposed new Regulation 8202, of "permanent establishment" applies for this purpose) in that country and of the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued,

• of the country in which the business is principally carried on, or

• if the affiliate is related to a non-resident corporation, of the country under whose laws that non-resident corporation is governed and any of exists, was (unless that non-resident corporation was continued in any jurisdiction) formed or organized, or was last continued, if those regulating laws are recognized under the laws of the country in which the business is principally carried on and all of those countries are members of the European Union.

Second, the "preamble" to paragraph (b) of the definition "investment business" is amended so that the concept of "member of a partnership (except where the affiliate is a specified member of the partnership)" is replaced by the concept of "qualifying member of a partnership".

Third, clause (b)(ii)(B) of the definition "investment business" is replaced by new clauses (b)(ii)(B) and (C) so that, in general terms, in determining whether the affiliate or the partnership employs the equivalent of more than 5 employees full time in the active conduct of the business, there is taken into account only services provided by the employees of the affiliate and services provided outside Canada by employees of

• a corporation related to the affiliate (clause (b)(ii)(A) of the definition), or

• where the affiliate carries on the business as a member of the partnership,

• where the affiliate carries on the business (otherwise than as a member of the partnership),

Fourth, the "postamble" to subparagraph (b)(ii) of the definition "investment business" is amended to reflect the changes to clauses (b)(ii)(B) and (C) of that definition.

The expression "qualifying member" is a newly introduced term and is defined in new paragraph 95(2)(o) for the purposes of subdivision i of Division B of Part I of the Act. That expression is, for the purposes of the Act generally, defined in amended subsection 248(1) of the Act as a person who would, at the relevant time, be determined to be a qualifying member of the partnership under paragraph 95(2)(o). For more information about the expression "qualifying member", see the commentary to paragraph 95(2)(o) and subsection 248(1).

The expressions "qualifying shareholder", "designated corporation" and "designated partnership" are also newly introduced terms and are defined in new paragraphs 95(2)(p), (s) and (t), respectively. For additional information, see the commentary to those paragraphs.

Amended subparagraph (a)(i) of the definition "investment business" applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999.

The amendments to the "preamble" of paragraph (b), and to subclause (b)(ii)(B)(I), of the definition "investment business", in conjunction with the new definition "qualifying member", ensure that, in applying paragraph (b) of the definition "investment business", limited partners who are qualifying members of a limited partnership are treated in the same manner as general partners of a general partnership. These amendments also ensure that, even if the activities of the relevant partner do not meet the business activity requirements in new subparagraph 95(2)(o)(i), a partnership may qualify under the "preamble" to paragraph (b) of the definition "investment business" (or a partner may qualify under clause (b)(ii)(C) of that definition) if the relevant partner has an equity interest in the partnership that meets the criteria set out in new subparagraph 95(2)(o)(ii). For more detail, see the commentary to new paragraph 95(2)(o).

New clause (b)(ii)(C) of the definition "investment business", in conjunction with the new definition "qualifying shareholder", ensures that in the case where the affiliate carries on the business (other than as a member of the partnership), services that are rendered outside of Canada by a corporation that was a "qualifying shareholder" of the affiliate, and otherwise meet the conditions set out in paragraph (b) of the definition, may be taken into account in determining whether the "more than 5 employees full time" equivalency test in subparagraph (b)(ii) is met. For more detail, see the commentary to the definition "qualifying shareholder" in paragraph 95(2)(p).

New subclauses (b)(ii)(B)(II), (III) and (C)(II) and (III) expand the scope of partnerships or corporations that may be taken into account in determining whether the "more than 5 employees full time" equivalency test in subparagraph (b)(ii) is met by introducing the concepts of a designated corporation and a designated partnership. For additional information, see commentary to paragraphs 95(2)(s) and (t).

The amendments to the "preamble" of paragraph (b), to clauses (b)(ii)(B) and (C), and to the "postamble" of subparagraph (b)(ii), of the definition "investment business" apply to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. These amendments are included in the Global Section 95 Election package described in the beginning of the commentary to section 95.

"taxable Canadian business"

Subsection 95(1) of the Act is amended to add the new definition "taxable Canadian business". This expression is used in new paragraphs 95(2)(j.1), (k), (k.2) and (k.4) of the Act. For more detail, see the commentaries to those paragraphs.

A "taxable Canadian business", at any time of a foreign affiliate of a taxpayer resident in Canada or of a partnership of which a foreign affiliate of a taxpayer resident in Canada is a member (which foreign affiliate or partnership is referred to in that definition as the "operator"), is a business the income from which, for the operator's taxation year or fiscal period that includes that time, is income

• that is included in computing the foreign affiliate's taxable income earned in Canada under subparagraph 115(1)(a)(ii), and

• that is not, because of a tax treaty with a country, exempt from tax under Part I of the Act.

In connection with the application of the definition "taxable Canadian business", note the rules in proposed new paragraph 95(2)(k.7). For more detail, see the commentary to that paragraph.

The amendment to add the new definition "taxable Canadian business" applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. This amendment is included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

Also note that the definition "tax treaty" in subsection 248(1) is applicable to the 1998 and subsequent taxation years. Accordingly, these amendments ensure, in effect, that, in applying the definition "taxable Canadian business" for the 1997 and prior taxation years of all foreign affiliates of the taxpayer in the case where a taxpayer has made a Fresh Start Section 95 Election, the reference in paragraph (b) of the definition "taxable Canadian business" to the expression "tax treaty" is to be read as a reference to a "comprehensive agreement or convention for the elimination of double taxation on income, between the Government of Canada and the government of another country, which has the force of law in Canada at that time".

Determination of Certain Components of Foreign Accrual Property Income

ITA
95(2)

Subsection 95(2) of the Act provides rules for determining the income, of a foreign affiliate of a taxpayer resident in Canada, from a particular source. A foreign affiliate is considered to have three sources of income - income from property, income from a business other than an active business and income from an active business. This sourcing is important since the affiliate's income from property and the affiliate's income from a business other than an active business are included in the foreign accrual property income (FAPI) of the affiliate. Where the affiliate is a controlled foreign affiliate of the taxpayer, the taxpayer's share of the affiliate's FAPI must be included, under section 91 of the Act, in the taxpayer's income for Canadian tax purposes whether or not the income is distributed. The income of a foreign affiliate of a taxpayer from an active business is included, under section 90 of the Act, in the taxpayer's income for Canadian tax purposes only when paid to the shareholder as a dividend.

ITA
95(2)(a)

Paragraph 95(2)(a) of the Act characterizes, in certain circumstances, amounts that would otherwise be income from property as income from an active business. More particularly, subparagraphs 95(2)(a)(i) to (iv) provide that particular income of a foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest throughout a taxation year of the affiliate, from sources in a country (other than Canada) that would otherwise be income from property of the affiliate for the year, will be included in computing the income from an active business of the affiliate for the year.

However, paragraph 95(2)(a) does not

• require amounts that would otherwise be "losses" from property of the affiliate to be included in computing the income from an active business of the affiliate, or

• require amounts that would otherwise be income or losses from property of the affiliate to be included in computing the "loss" from an active business of the affiliate.

Paragraph 95(2)(a) is amended so that throughout that paragraph, except clauses 95(2)(a)(ii)(D) and (E), the word "income" is replaced with the words "income or loss".

In general, these amendments to paragraph 95(2)(a) ensure that, provided that the conditions specified in that paragraph are satisfied,

• amounts that would otherwise be "losses" from property of the affiliate can be included in computing the income from an active business of the affiliate, and

• amounts that would otherwise be income or losses from property of the affiliate can be included in computing the "loss" from an active business of the affiliate.

The "preamble" of paragraph 95(2)(a) is also amended to broaden the scope of the paragraph to include those foreign affiliates in which the taxpayer does not have a qualifying interest but to which the taxpayer is related throughout the year. Those foreign affiliates would be controlled foreign affiliates of the taxpayer. (Refer to the commentary on new amended subclause 95(2)(a)(ii)(D)(III) for information regarding a similar change.)

These amendments to paragraph 95(2)(a) apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002.

ITA
95(2)(a)(i)

In general terms, subparagraph 95(2)(a)(i) of the Act permits a particular foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest, to include, in its active business income, its property income that

• is derived by it from activities that can reasonably be considered to be directly related to active business activities carried on in a country (other than Canada) by a person that is

• would, if that person were a foreign affiliate of the taxpayer and the income were earned by it, be included in computing the active business income of that person.

Case 2 deals with the situation where a foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest performs the treasury activities for the foreign branch of a Canadian multinational life insurer. The income of the treasury activities could be included in the active business income of the affiliate if the income would be active business income of the foreign branch if it were a foreign affiliate of the taxpayer and it earned the income.

However, Case 2 would not apply where, for example, a particular wholly-owned Canadian subsidiary of the taxpayer is a life insurance corporation resident in Canada that has a foreign branch and a foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest performs the treasury activities for the foreign branch. This is the case because the wholly-owned Canadian subsidiary of the taxpayer does not have a qualifying interest in the foreign affiliate of the taxpayer.

In order to address that concern, subclauses 95(2)(a)(i)(A)(II) and (B)(II) are amended to extend Case 2 to situations where the foreign branch is a foreign branch of a life insurance corporation resident in Canada that is the taxpayer, a person that controls the taxpayer or a person that is controlled by the taxpayer.

The amendments to subclauses 95(2)(a)(i)(A)(II) and (B)(II) apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. These amendments are included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

As noted in the opening commentary to paragraph 95(2)(a), amendments made to that paragraph ensure that, throughout subparagraph 95(2)(a)(i), the word "income" is replaced with the words "income or loss". For further detail on those amendments and on their coming-into-force provisions, refer to that commentary.

ITA
95(2)(a)(ii)

Subparagraph 95(2)(a)(ii) of the Act provides that income that would otherwise be income from property for a taxation year of a particular foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest, will be included in the particular affiliate's income from an active business for the year to the extent that the income is derived from amounts paid or payable, directly or indirectly, to the particular affiliate or a partnership of which it is a member

• by a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year or by a partnership of which the non-resident corporation is a member (other than where it is a specified member, as defined in subsection 248(1) of the Act, of the partnership at any time in a fiscal period of the partnership that ends in the year) to the extent that those amounts paid or payable are for expenditures (either an expenditure of a current nature or an expenditure in respect of which an allowance is claimed) that would, if the non-resident corporation or the partnership were a foreign affiliate of the taxpayer, be deductible in the year or a subsequent taxation year by it in computing the amounts prescribed to be its earnings or loss from an active business, other than an active business carried on in Canada (clause 95(2)(a)(ii)(A));

• by another foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest throughout the year or by a partnership of which the other foreign affiliate of the taxpayer is a member (other than where the other affiliate is a specified member of the partnership at any time in a fiscal period of the partnership that ends in the year) to the extent that those amounts paid or payable are for expenditures (either an expenditure of a current nature or an expenditure in respect of which an allowance is claimed) that are or would, if the partnership were a foreign affiliate of the taxpayer, be deductible in the year or a subsequent taxation year by the other affiliate or the partnership in computing the amounts prescribed to be its earnings or loss from an active business, other than an active business carried on in Canada (clause 95(2)(a)(ii)(B));

• by a partnership where the particular affiliate is a member of the partnership (other than where it is a "specified member" of the partnership at any time in a fiscal period of the partnership that ends in the year) to the extent that those amounts paid or payable are for expenditures (either an expenditure of a current nature or an expenditure in respect of which an allowance is claimed) that would, if the partnership were a foreign affiliate of the taxpayer, be deductible in the year or a subsequent taxation year in computing the amounts prescribed to be its earnings or loss from an active business carried on by it outside Canada (clause 95(2)(a)(ii)(C));

• by another foreign affiliate of the taxpayer that is related to the particular affiliate and the taxpayer throughout the year (the "second affiliate") pursuant to a legal obligation to pay interest on borrowed money used to acquire, or on an amount payable for the acquisition of, property where

• by the taxpayer, where the taxpayer is a life insurance corporation resident in Canada, to the extent that those amounts paid or payable are for expenditures that are deductible in the year or a subsequent taxation year by the life insurance corporation resident in Canada in computing its income or loss from carrying on its insurance business outside Canada and not in Canada (clause 95(2)(a)(ii)(E)).

A foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest, will be precluded from using clauses 95(2)(a)(ii)(A), (B) and (C) if the relevant member of the partnership referred to in those clauses is a specified member of the partnership.

Generally, a "specified member" of a partnership in a fiscal period of the partnership is defined in subsection 248(1) of the Act as being

• a member who was a limited partner (within the meaning assigned by subsection 96(2.4)) of the partnership at any time in the fiscal period, or

• a member who, throughout that part of the fiscal period that a business of the partnership is ordinarily carried on and during which the member was a member of the partnership, was neither

Subparagraph 95(2)(a)(ii) is amended in the following ways.

First, clauses 95(2)(a)(ii)(A) to (C) are amended so that the condition requiring the relevant member of the partnership to be a member of the partnership (otherwise than as a specified member of the partnership) is replaced by the condition requiring the relevant member to be a "qualifying member" of the partnership throughout each period, in the fiscal period of the partnership that ends in the year, in which the relevant member was a member of the partnership. The expression "qualifying member" is a new term. It is defined in new paragraph 95(2)(o) for the purposes of subdivision i of Division B of Part I of the Act, and, defined in subsection 248(1) for the purposes of the Act generally, as being a person that would at the relevant time be determined under paragraph 95(2)(o) to be a qualifying member of the partnership. For more detail on the definition "qualifying member", see the commentary to paragraph 95(2)(o) and subsection 248(1).

The amendments to clauses 95(2)(a)(ii)(A) to (C), in conjunction with the new definition "qualifying member", ensure that, in applying those clauses, limited partners of limited partnerships that are qualifying members are treated in the same manner as general partners of general partnerships. Those provisions also ensure that, even if the activities of the relevant person do not meet the business activity requirements in new subparagraph 95(2)(o)(i), a partnership may still qualify under clause 95(2)(a)(ii)(A), (B) or (C) if the relevant person has an equity interest in the partnership that meets the criteria set out in new subparagraph 95(2)(o)(ii). For more detail, see the commentary to new paragraph 95(2)(o).

Second, clause 95(2)(a)(ii)(D) is amended to

• introduce the concept of a particular period in the "preamble" to clause 95(2)(a)(ii)(D) and in subclause 95(2)(a)(ii)(D)(III),

• provide in subclause 95(2)(a)(ii)(D)(III) that a foreign affiliate of the taxpayer to which the taxpayer is related can be a "third affiliate" defined in that subclause,

• replace current subclause 95(2)(a)(ii)(D)(IV) with new subclauses 95(2)(a)(ii)(D)(IV) and (V), and

• remove the requirement that existed in current subclause 95(2)(a)(ii)(D)(V).

The "preamble" to clause (D) is amended to describe amounts paid or payable by the "second affiliate" as being in respect of a particular period which period is then the time frame during which the shares of the "third affiliate" must be excluded property.

Under existing subclause 95(2)(a)(ii)(D)(III), a foreign affiliate of a taxpayer cannot be a "third affiliate" defined in that subclause unless the foreign affiliate is a foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest. The amendment permits a foreign affiliate of the taxpayer that is related to the taxpayer to be a "third affiliate" defined in that subclause. Related foreign affiliates would be controlled foreign affiliates of the taxpayer.

Under existing subclause 95(2)(a)(ii)(D)(IV), the "second affiliate" and the "third affiliate" must be resident in and subject to income taxation in the same country. Thus, each of those affiliates must itself be subject to income taxation in that country and cannot be a flow-through entity under the income tax laws of that country. Amended subclauses 95(2)(a)(ii)(D)(IV) and (V) are intended to accommodate the case where the second affiliate, the third affiliate, or both, are such a flow-through entity.

New subclause 95(2)(a)(ii)(D)(IV) requires that the second affiliate and the third affiliate be resident in the same country for each of their taxation years (each of which taxation years is referred to as a "relevant taxation year" of the second affiliate or of the third affiliate, as the case may be) that end in the year.

New subclause 95(2)(a)(ii)(D)(V) requires that, in respect of each of the second affiliate and the third affiliate for each relevant taxation year of that affiliate, either

• that affiliate be subject to income taxation in that country in that relevant taxation year (sub-subclause 95(2)(a)(ii)(D)(V)1.), or

• the members or shareholders of that affiliate (which, for the purpose of sub-subclause 95(2)(a)(ii)(D)(V)2.), includes a person that has, directly or indirectly, an interest in a share of, or in an equity interest in, the affiliate) at the end of that relevant taxation year be subject to income taxation in that country on, in aggregate, all or substantially all of the income of that affiliate for that relevant taxation year in their taxation years in which that relevant taxation year ends or would be so subject to income taxation in that country if that affiliate had income for that relevant taxation year and the income of those members or shareholders for their taxation years in which that relevant taxation year ends consisted only of their share of income of that affiliate for that relevant taxation year (sub-subclause 95(2)(a)(ii)(D)(V)2.).

Current subclause 95(2)(a)(ii)(D)(V) contains the requirement that the amounts paid or payable by the second affiliate to the particular affiliate must be relevant in computing the liability for income taxes in that country of a corporate group composed of the second affiliate and one or more other foreign affiliates of the taxpayer (the shares of which are excluded property) that are resident in, and subject to income taxation in, that country and in respect of which the taxpayer has a qualifying interest throughout the year. Clause 95(2)(a)(ii)(D) is amended to remove the requirement contained in current subclause 95(2)(a)(ii)(D)(V).

Third, as noted above, current clause 95(2)(a)(ii)(E) provides for the recharacterization of certain amounts paid or payable to the particular affiliate, where the payer is the taxpayer and the taxpayer is a life insurance corporation resident in Canada, to the extent that those amounts are for expenditures that are deductible in the year or a subsequent taxation year by the taxpayer in computing its income or loss from carrying on its insurance business outside Canada and not in Canada.

Clause 95(2)(a)(ii)(E) is amended to provide for the recharacterization of certain amounts paid or payable to the particular affiliate, where the payer is a life insurance corporation that is resident in Canada and is the taxpayer, a person who controls the taxpayer or a person controlled by the taxpayer, to the extent that those amounts were for expenditures that are deductible in the year or in a subsequent taxation year by the life insurance corporation in computing its income or loss from carrying on its life insurance business outside Canada and are not deductible in the year or a subsequent taxation year in computing its income or loss from carrying on its life insurance business in Canada.

For additional detail, see the commentary to subclauses 95(2)(a)(i)(A)(II) and (B)(II).

Fourth, as noted in the opening commentary to paragraph 95(2)(a), the amendments to that paragraph ensure that, throughout subparagraph 95(2)(a)(ii), except clauses (D) and (E), the word "income" is replaced with the words "income or loss". For further detail on those amendments and on their coming-into-force provisions, see that commentary.

New subclauses 95(2)(a)(ii)(A)(II) and (B)(II) and new clause 95(2)(a)(ii)(C) apply to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. These amendments are included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

New clause 95(2)(a)(ii)(D) applies to taxation years of a foreign affiliate of a taxpayer, that begin after December 20, 2002. However, where the taxpayer elects in writing and files that election with the Minister of National Revenue on or before the filing-due date for the taxpayer's taxation year that includes the day on which these amendments are assented to, subclauses 95(2)(a)(ii)(D)(III) to (V) apply in respect of all foreign affiliates of the taxpayer for taxations years that end after 1994. This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take such an election into account.

New clause 95(2)(a)(ii)(E) applies to taxation years of a foreign affiliate of a taxpayer, that begin after December 20, 2002. This amendment is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(a)(v) and (vi)

New subparagraph 95(2)(a)(v) of the Act ensures that, in computing the active business income or loss of a particular foreign affiliate, there is to be included the income or loss from property derived by the particular foreign affiliate from the disposition of excluded property that is not capital property of the particular foreign affiliate. The amendment is consequential to the amendments made to the definition "excluded property" in subsection 95(1).

New subparagraph 95(2)(a)(vi) of the Act ensures an income or a loss is treated as active business income or loss (and not as foreign accrual property income or loss) where that income or loss is derived under or as a result of certain agreements which provide for the purchase, sale or exchange of currency and relate to currency exchange risks with respect to amounts included in active business income or loss under paragraph 95(2)(a).

New subparagraphs 95(2)(a)(v) and (vi) apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. These subparagraphs are included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(a.1)(i)

Paragraph 95(2)(a.1) of the Act includes in the income from a business other than an active business (and thus the foreign accrual property income (FAPI) of a foreign affiliate) of a taxpayer resident in Canada, the income of the affiliate from the sale of property (including the income derived from services as agent provided in relation to a purchase or sale of property) if

• it is reasonable to conclude that the cost to any person of the property (other than property that was manufactured, produced, grown, extracted or processed in Canada by the taxpayer or a person with which the taxpayer does not deal at arm's length in the course of carrying on a business in Canada and that was subsequently sold to non-resident persons other than the affiliate or to the affiliate for sale to non-resident persons) is relevant in computing the income from a business carried on by the taxpayer or a person resident in Canada that does not deal at arm's length with the taxpayer or is relevant in computing the income from a business carried on in Canada by a non-resident person with whom the taxpayer does not deal at arm's length (subparagraph 95(2)(a.1)(i)), and

• the property was not manufactured, produced, grown, extracted or processed in the country under whose laws the affiliate was formed (or continued) and exists and is governed, and the affiliate's business was principally carried on in that country (subparagraph 95(2)(a.1)(ii)).

The rule does not apply where more than 90% of the gross income of the affiliate from the sale of property is derived from sales of property (other than property that falls within the exclusions described above) to persons that deal at arm's length with the affiliate, which, for this purpose, includes a sale of property to a related non-resident corporation for sale by it to arm's length persons. Where the rule applies to the foreign affiliate of the taxpayer, the selling of the property is deemed to be a separate business other than an active business of the affiliate. Any income that pertains to or is incident to that business is also deemed to be income of the affiliate from a business other than an active business of the affiliate.

Subparagraph 95(2)(a.1)(i) is amended to replace the description of the property that is excluded from the application of that subparagraph with a new description for that property. Under the new description, property will qualify for the exclusion if it is "designated property" and was subsequently sold to non-resident persons other than the affiliate or to the affiliate for sale to non-resident persons.

The definition "designated property" is provided in new subsection 95(3.1). Property is designated property if it is property that is described in the "preamble" of paragraph 95(2)(a.1) and that meets one of the three tests set out in paragraphs (a), (b) and (c), respectively, of that definition.

Under the first test (paragraph (a) of the definition), property is designated property if it is

• property that was - in the course of carrying on a business in Canada - manufactured, produced, grown, extracted or processed in Canada by the taxpayer, or by a person with whom the taxpayer does not deal at arm's length, or

• property that was - in the course of a business carried on by a foreign affiliate of the taxpayer outside Canada - manufactured or processed from tangible property that, at the time of the manufacturing or processing, was owned by the taxpayer or by a person related to the taxpayer and used or held by the owner in the course of carrying on a business in Canada, if the manufacturing or processing was in accordance with the specifications of the owner of the tangible property and under a contract between that owner and the foreign affiliate.

Under the second test (paragraph (b) of the definition), property is designated property if it was acquired, in the course of carrying on a business in Canada, by a purchaser from a vendor if

• the purchaser is the taxpayer or is a person resident in Canada with whom the taxpayer does not deal at arm's length, and

• the vendor is a person

Under the third test (paragraph (c) of the definition), property is designated property if it was acquired by a purchaser from a vendor if

• the purchaser is the taxpayer or is a person resident in Canada with whom the taxpayer does not deal at arm's length,

• the vendor is a foreign affiliate of

• the property was manufactured, produced, grown, extracted or processed in the country under whose laws the vendor is governed and any of exists, was (unless the vendor was continued in any jurisdiction) formed or organized, or was last continued, and in which the vendor's business is principally carried on.

The amendment to subparagraph 95(2)(a.1)(i) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. Where the taxpayer elects in writing and files that election with the Minister of National Revenue on or before the filing-due date for the taxpayer's taxation year in which these amendments are assented to, new subparagraph 95(2)(a.1)(i) and the new definition "designated property" in new subsection 95(3.1) of the Act apply in respect of all foreign affiliates of the taxpayer for taxations years that end after 1994.

Example 1

Facts:

1. Canco is a corporation resident in Canada.

2. Forco is a controlled foreign affiliate of Canco.

3. XYZ is a corporation resident in Canada with whom Canco deals at arm's length.

4. Forco sells property to arm's length purchasers situated outside Canada. All the gross revenue and income of Forco is derived from the sale of property acquired from Canco. That property was acquired by Canco from XYZ and was manufactured in Canada by XYZ.

Application of paragraph 95(2)(a.1)

Forco's income from the sale of the property that Forco had acquired from Canco would, because of existing paragraph 95(2)(a.1), be included in Forco's income from a business other than an active business and thus the FAPI of Forco. This is because existing subparagraph 95(2)(a.1)(i) exempts property manufactured in Canada only if it was manufactured by Canco or by a person with whom the Canco does not deal at arm's length. In this case, the manufacturer is XYZ, an arm's length corporation.

However, because of amended subparagraph 95(2)(a.1)(i) and paragraph (b) of the definition "designated property" in new subsection 95(3.1), Forco's income from the sale of the property acquired by Forco from Canco will not be recharacterized by paragraph 95(2)(a.1) as income from a business other than an active business.

Example 2

Facts:

1. Canco is a corporation resident in Canada.

2. FA1 is a controlled foreign affiliate of Canco that was formed, exists and is governed under the laws of foreign Country A. FA1's manufacturing business is principally carried on in that country. The gross revenue and income of FA1 is derived from the sale, to Canco, of the property that FA1 manufactures.

3. FA2 is a controlled foreign affiliate of Canco. FA2 was formed, exists and is governed under the laws of foreign Country B. FA2's business is principally carried on in that country. FA2 purchases, from Canco, property that was manufactured in Country A by FA1. FA2 sells the property to purchasers outside of Canada.

Application of paragraph 95(2)(a.1)

The income from the sale of the property acquired by FA2 from Canco would, because of existing paragraph 95(2)(a.1), be included in FA2's income from a business other than an active business and thus the FAPI of FA2. This is because existing subparagraph 95(2)(a.1)(i) exempts property manufactured, produced, grown, extracted or processed in Canada only where the property was manufactured, produced, grown, extracted or processed in Canada by Canco, or by a person with whom Canco does not deal at arm's length. In this case, the property was manufactured outside of Canada by FA1.

However, because of amended subparagraph 95(2)(a.1)(i) and paragraph (c) of the definition of "designated property" in new subsection 95(3.1), FA2's income from the sale of the property acquired by FA2 from Canco will not be recharacterized by paragraph 95(2)(a.1) as income from a business other than an active business.

ITA
95(2)(b)

Paragraph 95(2)(b) of the Act provides that if, in any of the specified circumstances referred to in that paragraph, a particular controlled foreign affiliate of a taxpayer provides services (or an undertaking to provide services), the provision of those services (or the undertaking) is deemed to be a separate business, other than an active business, carried on by the particular affiliate and any income from that business or that pertains to or is incident to that business is deemed to be income from a business other than an active business. Such income is therefore included in computing the particular affiliate's foreign accrual property income (FAPI).

The "preamble" of paragraph 95(2)(b) is amended to provide that if, in any of the circumstances referred to in that paragraph, any particular foreign affiliate of a taxpayer (whether or not that affiliate is a controlled foreign affiliate of the taxpayer) provides services (or an undertaking to provide services), the provision of those services (or the undertaking) is deemed to be a separate business, other than an active business, carried on by the particular affiliate and any income from that business or that pertains to or is incident to that business is deemed to be income from a business other than an active business.

Paragraph 95(2)(b) is amended in three ways.

First, clauses (A) and (B) of subparagraph 95(2)(b)(i) are replaced by new clause (A). That new clause ensures that income will be considered to be income from an business other than an active business of a foreign affiliate of a taxpayer, if the amount paid or payable in consideration for those services (or the undertaking to provide those services) is deductible, or can reasonably be considered to relate to an amount that is deductible, in computing the income from a business carried on in Canada, by

• any taxpayer of whom the affiliate is a foreign affiliate, or

• another taxpayer who does not deal at arm's length with any taxpayer of whom the affiliate is a foreign affiliate.

Second, a new clause (B) is added to subparagraph 95(2)(b)(i). That new clause ensures that, if a particular foreign affiliate of a taxpayer provides services (or an undertaking to provide services) and the amount paid or payable in consideration for those services (or the undertaking) is deductible, or can reasonably be considered to relate to an amount that is deductible, in computing the FAPI of a foreign affiliate of any taxpayer of whom the particular affiliate is a foreign affiliate or in computing the FAPI of a foreign affiliate of another taxpayer who does not deal at arm's length with any taxpayer of whom the affiliate is a foreign affiliate,

• the provision of those services (or the undertaking) is deemed to be a separate business, other than an active business, carried on by the particular affiliate, and

• any income from that business or that pertains to or is incident to that business is included in computing the particular affiliate's FAPI.

For example, new clause 95(2)(b)(i)(B) provides that, within a corporate group, income that would otherwise be income from an investment business (and therefore included in computing FAPI) of one foreign corporation in the group cannot be converted to active business income by the payment of fees to another foreign corporation in the group for services rendered to that investment business.

Third, subparagraph 95(2)(b)(ii) is amended to ensure that, if a particular foreign affiliate of a taxpayer provides services (or an undertaking to provide services) and those services are, or are to be, performed by a described party,

• the provision of those services (or the undertaking) is deemed to be a separate business, other than an active business, carried on by the particular affiliate, and

• any income from that business or that pertains to or is incident to that business is included in computing the particular affiliate's FAPI.

A described party is

• the taxpayer,

• a person resident in Canada with whom the taxpayer does not deal at arm's length,

• a partnership any member of which is a person described above, or

• a partnership in which any person or partnership described above has, directly or indirectly, a partnership interest.

These amendments to paragraph 95(2)(b) apply to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002 except that, in applying paragraph 95(2)(b) to a foreign affiliate of the taxpayer for taxation years of the foreign affiliate that begin after December 20, 2002 and on or before Announcement Date, that paragraph is to be read as follows:

ITA
95(2)(c.1) to (c.6)

New paragraphs 95(2)(c.1) to (c.6) of the Act put into place a regime that, in general terms, is intended to suspend the recognition of the capital gain that would have arisen upon an internal disposition by a foreign affiliate of a corporation resident in Canada (or a partnership of which the foreign affiliate is a member) of a share of another foreign affiliate of a corporation resident in Canada that is excluded property to the vendor (or would be excluded property to the vendor if the vendor were a foreign affiliate of the taxpayer) if such a disposition would otherwise result in a gain. Generally, this "suspended gain" is recognized when there is an external disposition of the share. See the definitions "specified vendor" and "specified purchaser" in proposed new subsection 95(3.2) to determine when a disposition of a share of the capital stock of a foreign affiliate of a corporation resident in Canada is an internal disposition. These provisions replace proposed subsections 93(1.4) to (1.6) of the Act that were found in the December 20, 2002 proposals.

New paragraphs 95(2)(c.1) to (c.6) will apply to dispositions that occur after December 20, 2002. However, those paragraphs will not apply to a disposition of a share of the capital stock of a foreign affiliate of a corporation resident in Canada by a vendor

• if the disposition of the share is required to be made under an agreement in writing made by the vendor on or before December 20, 2002, or

• if the disposition of the share occurs on or before Announcement Date and a valid election in respect of the vendor is made under subsection 133(40) of the enacting legislation.

Where such an election is made, the special rules set out under subsection 133(40) of the enacting legislation will apply. Generally, a modified version of the proposed subsections 93(1.4) to (1.6) that were part of the December 20, 2002 proposals will apply. For details about the election and about those special rules, see the draft enacting legislation that this commentary accompanies. Note also that this current set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take such an election into account.

ITA
95(2)(c.1)

New paragraph 95(2)(c.1) of the Act sets out the circumstances under which new paragraph 95(2)(c.2) will apply. Generally, new paragraph 95(2)(c.2) applies to a specified vendor (defined in new subsection 95(3.2)), in respect of a corporation resident in Canada, if:

• the specified vendor disposes of, at any time, a share of the capital stock of a foreign affiliate of the corporation resident in Canada, (referred to here as the "specified share", and which time is referred to here as the "original disposition time" of the specified share and which foreign affiliate is referred to here as the "disposed foreign affiliate") to a person or partnership that is, immediately after that time, a specified purchaser (defined in new subsection 95(3.2)) in respect of the corporation resident in Canada);

• immediately before the original disposition time, the specified share is excluded property of the specified vendor (or would be excluded property of the specified vendor if the specified vendor were, immediately before the original disposition time, a foreign affiliate of the corporation resident in Canada);

• if the Act were read without reference to paragraph 95(2)(c.2), the specified vendor would have a taxable capital gain from the disposition of the specified share; and

• none of paragraphs 88(3)(a) and 95(2)(c), (d) to (e.1) and (e.3) to (e.5) applies to the specified vendor in respect of the disposition of the share.

ITA
95(2)(c.2)

New paragraph 95(2)(c.2) of the Act sets out various rules that will apply to the specified vendor and the specified purchaser in respect of the corporation resident in Canada. The rules can be summarized as follows:

• Where the specified vendor is not a partnership, the proceeds of disposition (determined without reference to subsection 93(1)) from the disposition of the specified share (referred to in new subsection 95(2)(c.1)) are deemed to be an amount equal to one of the following two amounts:

• Where the specified vendor is a partnership of which a particular foreign affiliate of the particular corporation referred to in the definition "specified vendor" in new subsection 95(3.2) is a member, in computing the particular foreign affiliate's taxable capital gain from the disposition by the partnership of the specified share, the specified vendor's proceeds of disposition from the disposition of the specified share are deemed to be an amount that is equal to one of the following amounts:

• The specified purchaser's cost of the specified share is deemed to be the fair market value at the original disposition time of the specified share.

• The specified vendor's cost of property received as consideration for the disposition of the specified share is deemed to be the fair market value of the property at the original disposition time of the specified share.

• The specified vendor that is a foreign affiliate of the particular corporation resident in Canada or a foreign affiliate of the particular corporation resident in Canada that is a member of a partnership that is the specified vendor (here and in the commentary to paragraph 95(2)(c.3) referred to as the "relevant foreign affiliate") is deemed to have an unadjusted suspended gain in respect of a specified share disposed of, at the original disposition time, by the specified vendor that is equal to twice the amount, if any, by which

ITA
95(2)(c.3)

New subsection 95(2)(c.3) of the Act deems the specified vendor referred to in paragraph 95(2)(c.1) to have a capital gain from the disposition of the specified share (defined in new paragraph 95(2)(c.1)) equal to the amount of the adjusted suspended gain (see new section 5912 of the Regulations) in respect of the specified share and to have paid to the government of a country an amount equal to the adjusted allocable tax (see new section 5912 of the Regulations) in respect of the adjusted suspended gain at the earlier of

• the first time, after the original disposition time (defined in new paragraph 95(2)(c.1)), that a specified purchaser (defined in new subsection 95(3.2)) in respect of the particular corporation that holds, immediately before that first time, the specified share makes a triggering disposition (defined in new subsection 95(3.3)) of the specified share; and

• the first time, after the original disposition time, that a specified purchaser (the "current holder") in respect of the particular corporation that holds, immediately before that first time, the specified share ceases to be a specified purchaser in respect of the particular corporation otherwise than because of a specified discontinuance (defined in new subsection 95(3.2)) of the current holder.

ITA
95(2)(c.4)

New paragraph 95(2)(c.4) of the Act provides, for the purpose of paragraph 95(2)(c.3), that - if a specified purchaser (defined in new subsection 95(3.2) and referred to here as a "current holder") in respect of a corporation resident in Canada holds the specified share (defined in paragraph 95(2)(c.1)) and that share is redeemed, acquired or cancelled (otherwise than on a "dividend-like redemption" of that share defined in new subsection 95(3.2)) by the disposed foreign affiliate (defined in new paragraph 95(2)(c.1)) - the specified share is deemed to continue to exist, and the current holder is deemed to continue to hold the share, until the time that the current holder ceases to be a specified purchaser in respect of the corporation resident in Canada otherwise than because of a specified discontinuance (defined in new subsection 95(3.3)) of the current holder.

ITA
95(2)(c.5)

New paragraph 95(2)(c.5) of the Act provides, for the purpose of paragraph 95(2)(c.3), that - if a specified purchaser (defined in new subsection 95(3.2) and referred to here as a "current holder") in respect of a corporation resident in Canada holds a specified share (described in new paragraph 95(2)(c.1)) in respect of the corporation resident in Canada and the specified share ceases to exist as a result of a dissolution, winding-up, cessation of existence, merger or combination described in paragraph (a) or (b) of the definition "specified discontinuance" in subsection 95(3.3) or subparagraph (a)(i) or (ii) of the definition "triggering disposition" in subsection 95(3.3) - the specified share is deemed to continue to exist, and the current holder is deemed to continue to hold the share, until the current holder ceases to be a specified purchaser in respect of the corporation resident in Canada otherwise than because of a specified discontinuance of the current holder.

ITA
95(2)(c.6)

New paragraph 95(2)(c.6) of the Act provides, for the purpose of paragraph 95(2)(c.3), that if a specified share (described in new paragraph 95(2)(c.1)) in respect of a corporation resident in Canada is exchanged for another share of the disposed foreign affiliate (described in new paragraph 95(2)(c.1)) the other share is deemed to be the specified share in respect of the corporation resident in Canada.

ITA
95(2)(d)

Paragraph 95(2)(d) of the Act provides rules that apply to a foreign affiliate of a taxpayer that is a shareholder of another foreign affiliate (a "predecessor foreign affiliate") of the taxpayer that participates in a foreign merger and that shareholder receives shares of a new foreign corporation formed on the foreign merger or the foreign parent corporation, as the case may be, in exchange for its shares in the predecessor foreign affiliate.

Paragraph 95(2)(d) is amended to provide the following rules in cases where there has been a foreign merger (other than a foreign merger to which proposed paragraph 95(2)(d.1) applies) of two or more predecessor foreign corporations to form a new foreign corporation that was, immediately after the foreign merger, a foreign affiliate of a corporation resident in Canada, and a particular foreign predecessor corporation to the foreign merger was, immediately before the foreign merger, a foreign affiliate of the corporation resident in Canada.

• each property of the particular foreign predecessor corporation that became property of the new foreign corporation as a result of the foreign merger is deemed to have been disposed by the particular foreign predecessor corporation to the new foreign corporation for proceeds of disposition equal to

• the cost of the property to the new foreign corporation, immediately after the foreign merger, is deemed to be equal to the amount so determined to be the particular foreign predecessor corporation's proceeds of disposition of the property,

• each shareholder of the particular foreign predecessor corporation that was, immediately before the foreign merger, a specified vendor in respect of the corporation resident in Canada

• the new foreign corporation is deemed to be the same person as, and a continuation of, the particular foreign predecessor corporation

• the taxation year of the particular predecessor foreign corporation that would otherwise include the time of the foreign merger is deemed to have ended immediately before that time, and

• where the fair market value of the share of the predecessor corporation exchanged by the shareholder on the foreign merger exceeds the fair market value of the share of the new foreign corporation received on the foreign merger for the exchanged share and it is reasonable to consider all or any portion of the excess as a benefit that the shareholder desired to have conferred on another shareholder of the new foreign corporation, the amount of the benefit

New paragraph 95(2)(d) applies to foreign mergers that occur after Announcement Date.

ITA
95(2)(d.1)

Paragraph 95(2)(d.1) of the Act provides for the rollover of capital property on a foreign merger where certain conditions have been met. One of these conditions (referred to as the "non-recognition condition") is that no gain or loss was recognized, under the income tax law of the country in which the predecessor foreign corporations were resident, in respect of any capital property of a predecessor foreign corporation that became capital property of the new foreign corporation in the course of the foreign merger.

Paragraph 95(2)(d.1) is amended in a number of ways.

First, paragraph 95(2)(d.1) is amended to provide for the rollover of property (including, but not restricted to capital property) on a foreign merger where certain conditions have been met. In addition, the non-recognition condition is amended to require that no income, gain or loss was recognized, under the income tax law of the country in which the predecessor foreign corporations were resident, in respect of any property of a predecessor foreign corporation that became property of the new foreign corporation in the course of the foreign merger.

Second, the amendments to subparagraph 95(2)(d.1)(ii) treat (for the purposes of paragraphs 95(2)(c.1) to (c.6), (f.1) to (f.93) and (h) to (h.5)) the new foreign corporation as the same corporation as and as a continuation of the predecessor foreign corporation.

Third, new subparagraph 95(2)(d.1)(iv) is a consequential to the amendments to paragraph 95(2)(d) and makes subsection 87(4) applicable to the shareholders of the predecessor foreign corporation that are foreign affiliates of the corporation resident in Canada.

The amendments to paragraph 95(2)(d.1) apply to foreign mergers that occur after December 20, 2002.

ITA
95(2)(e)

Paragraph 95(2)(e) of the Act provides rules for determining foreign accrual property income that apply when a foreign affiliate of a taxpayer dissolves and, on the dissolution, disposes of shares of a foreign affiliate of the taxpayer a to another foreign affiliate of the taxpayer.

Paragraph 95(2)(e) is amended to provide for the following rules if, at a particular time, a shareholder (other than a person resident in Canada) of a foreign affiliate (referred to in this paragraph as the "disposed foreign affiliate") of a particular corporation resident in Canada that is a specified purchaser in respect of the particular corporation receives, in the course of a liquidation and dissolution (other than a liquidation and dissolution to which paragraph 95(2)(e.1) applies) of the disposed foreign affiliate, a property from the disposed foreign affiliate:

• the disposed foreign affiliate's proceeds of disposition of the property are deemed to be

• the cost of the property to the shareholder immediately after the particular time is deemed to be an amount equal to the disposed foreign affiliate's proceeds of disposition of the property determined above,

• the property is deemed to have been received by the shareholder as proceeds of disposition of shares of the disposed foreign affiliate disposed of by the shareholder in the course of the liquidation and dissolution,

• each particular share of the disposed foreign affiliate disposed of by the shareholder in the course of the liquidation and dissolution is deemed to have been disposed of for proceeds that are equal to the amount determined by the formula

• any gain from the disposition of the shares of the disposed foreign affiliate disposed of by the shareholder in the course of the liquidation and dissolution that, but for this subparagraph, would be a gain from the disposition of excluded property of the shareholder, is deemed to be the lesser of

• the shareholder is deemed to be the same person as, and a continuation of, the disposed foreign affiliate

• the taxation year of the disposed foreign affiliate that would otherwise include the time that the disposed foreign affiliate is dissolved is deemed to have ended immediately before that time.

A "specified purchaser" in respect of a corporation resident in Canada is defined in proposed new subsection 95(3.2) of the Act.

The amendments to paragraph 95(2)(e) apply to liquidations that begin after Announcement Date.

ITA
95(2)(e.1)

Paragraph 95(2)(e.1) of the Act provides for the rollover of capital property on a liquidation and a dissolution of a foreign affiliate of a taxpayer where certain conditions have been met. One of these conditions (referred to as the "non-recognition condition") is that no gain or loss was recognized, under the income tax law of the country in which the disposing affiliate was resident, by the disposing affiliate in respect of any property of the disposing affiliate that was distributed by the disposing affiliate in the course of the liquidation to another foreign affiliate, of the taxpayer, resident in that country.

Paragraph 95(2)(e.1) is amended in the following ways.

First, paragraph 95(2)(e.1) is amended to provide for the rollover of property (including, but not restricted to, capital property) on a liquidation and a dissolution of a foreign affiliate of a taxpayer where certain conditions have been met.

Second, the non-recognition condition in paragraph 95(2)(e.1) is amended to require that no income, gain or loss was recognized, under the income tax law of the country in which the disposing affiliate was resident, by the disposing affiliate in respect of any property of the disposing affiliate that was distributed by the disposing affiliate in the course of the liquidation and dissolution to another foreign affiliate of the taxpayer. The non-recognition condition no longer requires that this other foreign affiliate be resident in the same country as the disposing affiliate.

Third, the amendments to subparagraph 95(2)(e.1)(ii) treat (for the purposes of paragraphs 95(2)(c.1) to (c.6), (f.1) to (f.93) and (h) to (h.5)) the shareholder of the disposing affiliate as the same corporation as the disposing affiliate.

New paragraph 95(2)(e.1) applies to liquidations that begin after December 20, 2002.

ITA
95(2)(e.2)

New paragraph 95(2)(e.2) of the Act provides that, for the purpose of new paragraph 95(2)(e.1), a redemption, acquisition or cancellation of the shares of a foreign affiliate of a corporation resident in Canada will be treated as a liquidation and a dissolution of the foreign affiliate if:

• the surplus entitlement percentage of the corporation resident in Canada, in respect of the foreign affiliate, immediately before the redemption, acquisition or cancellation is more than 90%, and the surplus entitlement percentage of the corporation resident in Canada, in respect of the foreign affiliate is, immediately after the redemption, acquisition or cancellation, nil, and the foreign affiliate has no issued and outstanding shares immediately after the redemption, acquisition or cancellation; or

• in the course of the redemption, acquisition or cancellation, property having a fair market value equal to or greater than 90% of the fair market value, immediately before the redemption, acquisition or cancellation, of the property owned by the foreign affiliate is, because of the redemption, acquisition or cancellation, distributed to the shareholders of the foreign affiliate.

New paragraph 95(2)(e.2) applies to redemptions, acquisitions or cancellations that occur after Announcement Date other than a redemption, an acquisition or a cancellation of shares of a holder of shares that are required to be made under an agreement in writing made by the holder on or before Announcement Date.

ITA
95(2)(e.3) to (e.6)

New paragraphs 95(2)(e.3) to (e.6) of the Act put into place a regime that, in general terms, is intended to provide to a foreign affiliate of a corporation resident in Canada the possibility of rollover treatment (and avoidance of gains that will be included in foreign accrual property income) for dispositions of excluded property of the foreign affiliate to a specified purchaser in respect of the corporation resident in Canada. A "specified purchaser" in respect of a corporation resident in Canada is defined in proposed new subsection 95(3.2) of the Act.

Paragraphs 95(2)(e.3) to (e.6) apply to a receipt, after Announcement Date, by a specified purchaser in respect of the corporation resident in Canada from a foreign affiliate of the corporation resident in Canada of property as a dividend or distribution in respect of a share of the foreign affiliate, or as consideration in respect of a redemption, purchase or acquisition of a share of the foreign affiliate. The paragraphs do not apply where the property was received because of a legal obligation of the foreign affiliate that arose on or before Announcement Date to pay the dividend or make the distribution, redemption, purchase or acquisition.

ITA
95(2)(e.3)

New paragraph 95(2)(e.3) of the Act provides for the following rules (notwithstanding subsection 52(2)), if, at a particular time, a shareholder (other than a person resident in Canada), of a foreign affiliate of a corporation resident in Canada, that is a specified purchaser (defined in new subsection 95(3.2)) in respect of the corporation resident in Canada receives (otherwise than in the course of a liquidation and dissolution of the foreign affiliate or a merger or combination of corporations involving the foreign affiliate) a property from the foreign affiliate as a dividend or distribution on a share of the foreign affiliate.

• The foreign affiliate's proceeds of disposition of the property are deemed to be:

• The cost of the property to the shareholder, immediately after the particular time, is deemed to be an amount equal to the foreign affiliate's proceeds of disposition of the property determined above.

• The amount of that dividend or distribution, in respect of the property, is deemed to be equal to the foreign affiliate's proceeds of disposition of the property determined above.

• Where, but for subparagraph 95(2)(e.3)(iv) (the provision described by this paragraph), the shareholder would, because of subsection 40(3), have a gain in respect of the share of the foreign affiliate on or in respect of which the dividend or distribution was received and the share of the foreign affiliate is excluded property of the shareholder (or would be excluded property of the shareholder if the shareholder were a foreign affiliate of the particular corporation), for the purposes of applying subsection 40(3), the amount prescribed by paragraph 5900(1)(c) of the Regulations to have been paid out of the pre-acquisition surplus of the particular foreign corporation's foreign affiliate from which the property was received, otherwise determined, in respect of the dividend or distribution in respect of the share shall be deemed to be the lesser of:

ITA
95(2)(e.4)

New subparagraph 95(2)(e.4) of the Act provides for the following rules if, at a particular time, a shareholder (other than a person resident in Canada), of a foreign affiliate of a corporation resident in Canada, that is a specified purchaser in respect of the corporation resident in Canada, receives (otherwise than in the course of the liquidation and dissolution of the foreign affiliate or a merger or combination of corporations that includes the foreign affiliate) a property from the foreign affiliate as consideration in respect of a dividend-like redemption (defined in subsection 95(3.2)) of a share of the foreign affiliate by the foreign affiliate.

• The foreign affiliate's proceeds of disposition of the property are deemed to be

• The cost of the property immediately after the particular time to the shareholder is deemed to be an amount equal to the amount of the foreign affiliate's proceeds of disposition of the property determined above.

• The property is deemed to have been received by the shareholder as a dividend on the share and the amount of that dividend, in respect of the property, is deemed to be equal to the amount of the foreign affiliate's proceeds of disposition of the property determined above.

• Where the share of the foreign affiliate redeemed is excluded property of the shareholder (or would be excluded property of the shareholder if the shareholder were a foreign affiliate of the particular corporation), the shareholder is deemed to have disposed of the share for proceeds of disposition equal to the cost amount of the share to the shareholder immediately before the disposition.

• Where, but for subparagraph 95(2)(e.4)(v) (the provision described by this paragraph), the shareholder would, because of subsection 40(3), have a gain in respect of the share of the foreign affiliate because of the dividend received by the shareholder in respect of the redemption of the share, for the purposes of applying subsection 40(3), the amount prescribed by paragraph 5900(1)(c) of the Regulations to have been paid out of the pre-acquisition surplus of the foreign affiliate - of the corporation resident in Canada - from which the property was received, otherwise determined, in respect of the deemed dividend described above in respect of the share is deemed to be the lesser of

ITA
95(2)(e.5)

New paragraph 95(2)(e.5) of the Act provides the following rules if, at a particular time, a shareholder (other than a person resident in Canada), of a foreign affiliate of a corporation resident in Canada, that is a specified purchaser (defined in new paragraph 95(3.2)) in respect of the corporation resident in Canada receives (otherwise than in the course of a dividend-like redemption (defined in subsection 95(3.2)), a liquidation and dissolution of the foreign affiliate, or a merger or combination of corporations that includes the foreign affiliate) a property from the foreign affiliate as consideration in respect of a redemption, acquisition or cancellation (the "particular redemption") of a particular share of the foreign affiliate by the foreign affiliate as part of a redemption, acquisition or cancellation (the "total redemption") of one or more shares (including the particular share) of the foreign affiliate held by the shareholder.

• The foreign affiliate's proceeds of disposition of the property are deemed to be:

• The cost of the property to the shareholder immediately after the particular time is deemed to be the foreign affiliate's proceeds of disposition of the property. (Subparagraph 95(2)(e.5)(ii))

• The property is deemed to have been received by the shareholder as proceeds of disposition of shares of the foreign affiliate disposed of by the shareholder in the course of the particular redemption.

• The particular share disposed of to the foreign affiliate because of the particular redemption is deemed to have been disposed of for proceeds that are equal to the amount determined by the formula

• Any gain from the disposition of a particular share of the foreign affiliate disposed of by the shareholder in the course of the total redemption that, but for subparagraph 95(2)(e.5)(v) (the provision described by this bullet), would be a gain from the disposition of excluded property of the shareholder, is deemed to be the lesser of:

ITA
95(2)(e.6)

New paragraph 95(2)(e.6) of the Act provides the following rules, for the purposes of applying paragraphs 95(2)(e) and (e.3) to (e.5) for the purposes of determining a foreign affiliate's income from the partnership, if the shareholder of the foreign affiliate of the corporation resident in Canada referred to in those paragraphs is the partnership and the foreign affiliate of the corporation resident in Canada is a member of the partnership.

• Shares of a foreign affiliate of the corporation resident in Canada referred to in those paragraphs that are property of the partnership, or are deemed under paragraph 95(2)(e.6) to be property of the partnership, are deemed to be owned at that time by each member of the partnership in a proportion equal to the proportion of the shares that:

• Each amount determined under any of paragraphs 95(2)(e) and (e.3) to (e.5) in respect of the partnership in respect of the shares of the foreign affiliate deemed above to be owned by a member of the partnership that is a foreign affiliate of the corporation resident in Canada is deemed to be the amount determined under that paragraph in respect of the member in respect of those shares.

• The income, gain or loss derived by the partnership, while a foreign affiliate of the corporation resident in Canada is a member of the partnership, in respect of the shares deemed above to be owned by the foreign affiliate

ITA
95(2)(f)

Paragraph 95(2)(f) of the Act sets out rules for computing a taxable capital gain and an allowable capital loss of a foreign affiliate of a taxpayer resident in Canada from a disposition of a property. The rules in paragraph 95(2)(f) address the computation of a gain or loss from a disposition of property whether the disposition is made by the foreign affiliate itself or by a partnership of which the foreign affiliate is a member.

That paragraph also provides a relieving provision (contained in that portion of that paragraph that is between subparagraphs (ii) and (iii)) that provides that, in computing any such gain or loss from the disposition of property that was owned by the foreign affiliate at the last time that the foreign affiliate became a foreign affiliate of the taxpayer resident in Canada, there is not to be included such portion of the gain or loss, as the case may be, as can reasonably be considered to have accrued during the period that the foreign affiliate was not a foreign affiliate of the taxpayer resident in Canada or of a person specified in any of subparagraphs 95(2)(f)(iv) to (vii).

Paragraph 95(2)(f) is amended in the following ways:

• The "preamble" of paragraph 95(2)(f) is amended to clarify that the rules in that paragraph apply in respect of the taxpayer in computing the foreign affiliate's capital gains and capital losses from a disposition of property by the affiliate or a partnership. This amendment to paragraph 95(2)(f) will, for example, preclude the recognition of capital gains or capital losses from the disposition of property by a foreign affiliate or a partnership to the extent that the gain or loss can reasonably be considered to have accrued during the period that the affiliate was not a foreign affiliate of the taxpayer or a person or partnership specified in paragraph 95(2)(f). This is relevant for the purpose of computing the tax surpluses and deficits of the affiliate in respect of the taxpayer and computing the affiliate's foreign accrual property income or loss of the affiliate in respect of the taxpayer.

• Subparagraph 95(2)(f)(i) is amended to add references to new paragraphs 95(2)(c.2), (d.1), (e.3) to (e.5) and (f.4). For information about those paragraphs, see the commentaries for those paragraphs.

• The "mid-amble" of paragraph 95(2)(f) is amended to replace the words "owned by the affiliate" with the words "owned by the person or partnership". This amendment addresses situations where the property disposed of was owned by a partnership of which the foreign affiliate of the taxpayer is a member. This amendment also ensures that, in computing a gain or loss from the disposition of property, no portion of the gain or loss, as the case may be, that can reasonably be considered to have accrued during the period that the affiliate was not a foreign affiliate of the taxpayer or of a person specified in subparagraphs 95(2)(f)(iv) to (viii) is included.

• The "mid-amble" of paragraph 95(2)(f) is further amended to delete the words "at the time it last became a foreign affiliate of the taxpayer". This requirement was unnecessary for the operation of paragraph 95(2)(f).

• New subparagraph 95(2)(f)(viii) is added to include, in the listed parties, a partnership, where the total of all amounts each of which is the fair market value of a partnership interest in the partnership owned by a person described in any of subparagraphs 95(2)(f)(iii) to (vii) is greater than or equal to 90% of the fair market value of all partnership interests in the partnership.

The amendments to the "preamble" of paragraph 95(2)(f) apply to taxation years, of a foreign affiliate of a taxpayer, that end after 1999.

The amendment to subparagraph 95(2)(f)(i) applies to taxation years, of a foreign affiliate of a taxpayer, that end after December 20, 2002.

The amendment to the "mid-amble" of paragraph 95(2)(f) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. However, see the commentary to new subsection 95(2.2) for details of an election to apply the amendments to the "mid-amble" of paragraph 95(2)(f) to taxation years, of all foreign affiliates of the taxpayer, that begin after 1994. Note also that the amendments to the "mid-amble" of the paragraph 95(2)(f) are part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

The enactment of new subparagraph 95(2)(f)(viii) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after Announcement Date.

ITA
95(2)(f.1)

New paragraph 95(2)(f.1) of the Act provides rules that apply in computing the income or loss of a foreign affiliate of a taxpayer from property, or the income or loss from a business other than an active business of a foreign affiliate of a taxpayer resident in Canada, in respect of the taxpayer. The rules can be summarized as follows:

• the income or loss is computed in respect of the taxpayer in Canadian currency, as though the foreign affiliate were resident in Canada and as though the Act were read without reference to subsections 14(1.01) to (1.03), 17(1) and 18(4) and section 91, and

• the income or loss is to be computed as if it does not include any income or loss that can reasonably be considered to have been realized or to have accrued during any period throughout which the affiliate was not a foreign affiliate of the taxpayer or of another person or partnership described in any of subparagraphs 95(2)(f)(iii) to (viii).

Related rules can be found in proposed new paragraphs 95(2)(f.91) to (f.93).

For details about new amended subsection 14(1.01) and new subsections 14(1.02) and (1.03), see the commentary to those subsections.

New paragraph 95(2)(f.1) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002, except that for those taxation years that begin on or before Announcement Date, subparagraph 95(2)(f.1)(iv) is to be read as follows:

"(iv) there were not included in computing the income or loss the portion of the income or loss that can reasonably be considered to have been realized or to have accrued during any period throughout which the affiliate was not a foreign affiliate of the taxpayer or of a person described in any of subparagraphs (f)(iii) to (vii);"

Note that new paragraph 95(2)(f.1) is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(f.2)

New paragraph 95(2)(f.2) of the Act provides that the income or loss of a foreign affiliate of a taxpayer arising from the disposition of excluded property which is not capital property (other than a disposition of property to which any of paragraphs 95(2)(d) to (e.1), (e.3) to (e.5) and (f.4) and 88(3)(a) of the Act applies) is to be computed in respect of the taxpayer in the currency of the country in which the foreign affiliate is resident or in another currency that is reasonable in the circumstances. (The expression "excluded property" is defined in subsection 95(1).) The calculations provided for in new paragraph 95(2)(f.2) are comparable to those provided for in the rule in subsection 5907(6) of the Regulations.

New subparagraph 95(2)(f.2) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. Note that new paragraph 95(2)(f.2) is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(f.3) to (f.9)

New paragraphs 95(2)(f.3) to (f.9) of the Act put into place a regime that, in general terms, is designed to suspend the recognition of the income or capital gain that would otherwise arisen upon an internal disposition of an excluded property. Generally, this "suspended gain" is recognized at the time the property is disposed of in an external disposition. This regime replaces the rules found in existing subsection 5907(5.1) of the Regulations and the rules found in proposed subsections 5907(5.1) to (5.3) of the Regulations that were part of the December 20, 2002 proposals.

New paragraphs 95(2)(f.3) to (f.9) will apply to dispositions of property that occur after Announcement Date. However, those paragraphs will not apply to a disposition by a vendor that is required to be made under an agreement in writing made by the vendor on or before Announcement Date.

ITA
95(2)(f.3)

New paragraph 95(2)(f.3) of the Act provides the circumstances under which new paragraph 95(2)(f.4) applies to a specified vendor (defined in new subsection 95(3.2)) in respect of a particular corporation resident in Canada if the following conditions are met:

• the specified vendor disposes at any time of a property that, at that time, is excluded property of the vendor (or would be excluded property of the vendor if the vendor were, at that time, a foreign affiliate of the particular corporation) to a person or partnership that is, immediately after that time, a specified purchaser (defined in new subsection 95(3.2)) in respect of the particular corporation, and

• if this Act were read without reference to paragraph 95(2)(f.4), the specified vendor would have income or a taxable capital gain from the disposition of the property.

In new paragraphs 95(2)(f.4) and (f.5) and (f.7) to (f.9), the specified vendor is referred to as the "vendor", the time of the disposition of the excluded property is referred to as the "original disposition time" and the property is referred to as the "specified property".

ITA
95(2)(f.4)

New paragraph 95(2)(f.4) of the Act sets out rules that apply to a vendor and a purchaser in respect of a particular disposition of specified property referred to in new paragraph 95(2)(f.3). In new paragraph 95(2)(f.4), the specified vendor is referred to as the "vendor", the time of the disposition of the excluded property is referred to as the "original disposition time" and the property is referred to as the "specified property". The rules can be summarized as follows:

• The vendor's proceeds from the disposition of the specified property are deemed to be equal to the vendor's adjusted cost base of the specified property at the original disposition time (referred to in here in this commentary as the "relevant ACB amount") or, if the vendor that is a foreign affiliate of the particular corporation resident in Canada is a controlled foreign affiliate of the particular corporation resident in Canada at the end of that vendor's taxation year that includes the original disposition time of the specified property and the particular corporation resident in Canada so elects in prescribed manner and within the prescribed time (see proposed new section 5916 of the Regulations), the proceeds from the disposition of the property can be equal to an amount greater than the relevant ACB amount, but cannot exceed the fair market value of the specified property at the original disposition time.

• The cost to the purchaser of the specified property is deemed to be equal to the fair market value of the specified property at the original disposition time.

• The cost to the vendor of a particular property that was received as consideration for the disposition of the specified property is deemed to be the fair market value of the particular property at the original disposition time.

• The foreign affiliate of the particular corporation resident in Canada that is the vendor or that is a member of a partnership that is the vendor (which foreign affiliate is referred to in subparagraph 95(2)(f.4)(iv) and in paragraph 95(2)(f.5) as the "relevant foreign affiliate") is deemed to have an unadjusted suspended income or gain in respect of a specified property disposed of, at the original disposition time, equal to the amount, if any, by which

ITA
95(2)(f.5)

New paragraph 95(2)(f.5) of the Act deems the relevant foreign affiliate referred to in subparagraph 95(2)(f.4)(iv) to have income or a taxable capital gain from the disposition of the specified property equal to the amount prescribed to be the adjusted suspended income or gain (see proposed new subsection 5913(1) of the Regulations) in respect of the specified property and to have paid to the government of a country an amount equal to the amount prescribed by regulation to be the adjusted allocable tax (see proposed new subsection 5913(2) of the Regulations) in respect of the adjusted suspended income or gain in respect of the specified property at the earlier of

• the first time, after the original disposition time, that a specified purchaser in respect of the particular corporation that holds, immediately before that first time, the specified property and makes a triggering disposition (see definition in subsection 95(3.4)) of the specified property, or

• the first time, after the original disposition time, that a specified purchaser in respect of the particular corporation (which specified purchaser is referred to here and in paragraphs 95(2)(f.8) and (f.9) as the "current holder") that holds, immediately before that first time, the specified property, and ceases, at that first time, to be a specified purchaser in respect of the particular corporation otherwise than because of a specified discontinuance of the current holder.

ITA
95(2)(f.6)

New paragraph 95(2)(f.6) of the Act ensures that paragraph 95(2)(f.3) will not apply to a disposition of a property by a person or partnership if

• any of subsections 85.1(5) and 88(3) and paragraphs 95(2)(c), (c.2), (d), (d.1), (e), (e.1), (e.3), (e.4) and (e.5) applies to the person or partnership in respect of the disposition of the property, or

• the property was disposed of in the ordinary course of an active business of the person or partnership or was disposed of as an adventure or concern in the nature of trade.

ITA
95(2)(f.7)

New paragraph 95(2)(f.7) of the Act provides that for the purposes of paragraphs 95(2)(f.3) to (f.6) and (f.8) and (f.9) and subsection 95(3.4), a designated replacement property referred to in clause (b)(ii)(A), (B) or (C) of the definition "triggering disposition" in new subsection 95(3.4) is deemed to be the same property as the specified property referred to in that clause.

ITA
95(2)(f.8)

New paragraph 95(2)(f.8) of the Act provides that for the purposes of paragraph 95(2)(f.3) to (f.7) and (f.9) and subsection 95(3.4), where, at any time, part of a specified property (referred to here as the "initial specified property") is disposed of by a current holder (defined in new paragraph 95(2)(f.5)) and the remaining part of the specified property is retained by the current holder, the following rules apply:

• The part (referred to here as the "part interest") of the initial specified property disposed of, at that time, is deemed to be a specified property of the current holder.

• The portion of the unadjusted suspended income or gain attributable to the part interest is deemed to be that proportion of the adjusted suspended income or gain in respect of the whole of the initial specified property that the fair market value at that time of the part interest is of the fair market value at that time of the initial specified property.

• The part (referred to here as the "remaining interest") of the initial specified property not disposed of at that time is deemed to be a specified property of the current holder that was disposed of at the original disposition time.

• The amount of income or gain that would have been realized on the disposition of the remaining interest at the original disposition time is deemed to be the amount, if any, by which the unadjusted suspended income or gain in respect of the initial specified property exceeds the amount determined to be the unadjusted suspended income or gain in respect of the part interest.

ITA
95(2)(f.9)

New paragraph 95(2)(f.9) of the Act provides that for the purposes of paragraphs 95(2)(f.3) to (f.8), if a current holder (defined in new paragraph 95(2)(f.5)) disposes, at any particular time, of the whole of a specified property (referred to here as the "initial specified property") and as part of a transaction, or series of transactions or events, that includes the disposition of the initial specified property, a specified purchaser (defined in new subsection 95(3.2)) in respect of the particular corporation acquires a designated replacement property (referred to here as the "remaining interest") in respect of the initial specified property, the following rules apply:

• The remaining interest is deemed to be a specified property of the current holder that was disposed of at the original disposition time. (Subparagraph 95(2)(f.9)(i))

• The unadjusted suspended income or gain in respect of the remaining interest is deemed to be that portion of the unadjusted suspended income or gain in respect of the whole of the initial specified property (determined without reference to subparagraph 95(2)(f.9)(iii)) that the fair market value of the remaining interest, at the time it was acquired, is of the fair market value, at the particular time, of the initial specified property. (Subparagraph 95(2)(f.9)(ii))

• The unadjusted suspended income or gain in respect of the initial specified property is deemed to be the amount, if any, by which the unadjusted suspended income or gain in respect of the initial specified property (determined without reference to subparagraph 95(2)(f.9)(iii)) exceeds the amount determined by subparagraph 95(2)(f.9)(ii) to be the unadjusted suspended income or gain in respect of the remaining interest. (Subparagraph 95(2)(f.9)(iii))

ITA
95(2)(f.91) to (f.93)

In general terms, new paragraphs 95(2)(f.91) to (f.93) of the Act introduce rules relating to the determination of the cost of eligible capital property, and the capital cost and the undepreciated capital cost of depreciable capital property, of a non-resident corporation that becomes a foreign affiliate of a taxpayer resident in Canada for the purposes of computing the foreign affiliate's foreign accrual property income in respect of the taxpayer resident in Canada or in respect of a specified party in respect of the taxpayer resident in Canada. These rules complement the rules in new paragraph 95(2)(f.2) and are comparable to but not the same as the rules, in existing subsections 111(5.1) and (5.2) of the Act, that apply when control of a corporation has been acquired.

ITA
95(2)(f.91)

New paragraph 95(2)(f.91) of the Act provides certain additional rules for computing the foreign accrual property income of a foreign affiliate of a taxpayer in respect of the taxpayer.

New paragraph 95(2)(f.91) applies if, at a particular time, a non-resident corporation that, immediately before the particular time, was not a foreign affiliate of a particular taxpayer resident in Canada, or of a person or partnership that would - if the particular taxpayer were a taxpayer referred to in paragraphs 95(2)(f)(iii) to (viii) - be described by any of those subparagraphs (the particular taxpayer or each of those persons or partnerships being referred to in this paragraph and new paragraphs 95(2)(f.92), (f.93) and (f.94) as a "particular Canadian shareholder") becomes a foreign affiliate of the particular Canadian shareholder.

The non-resident corporation is referred to in this paragraph and paragraph 95(2)(f.92) as a "particular foreign affiliate" in respect of the particular Canadian shareholder. The particular time is referred to in this paragraph and in paragraph 95(2)(f.92) as the "status change time" in respect of the particular foreign affiliate of the particular Canadian shareholder.

New paragraph 95(2)(f.91) provides rules that apply in computing the particular foreign affiliate's foreign accrual property income in respect of the particular Canadian shareholder or a person or partnership that would - if the person or partnership were a taxpayer referred to in subparagraphs 95(2)(f)(iii) to (viii) - be described by any of those subparagraphs (the particular Canadian shareholder or each of those persons or partnerships being referred to in paragraph 95(2)(f.92) as a "relevant shareholder") for any taxation year of the particular foreign affiliate that ends after the status change time.

Those rules can be summarized as follows:

• For the purpose of determining the cumulative eligible capital of the particular foreign affiliate in respect of the particular Canadian shareholder, at the beginning of the particular foreign affiliate's taxation year that includes the status change time, in respect of each business (other than an active business) carried on by the particular foreign affiliate in that taxation year, the particular affiliate is deemed to have disposed, immediately before the beginning of that taxation year, of each "eligible property" (see third paragraph, below) of the particular foreign affiliate, at the time of that disposition, in respect of each business (other than an active business) carried on by the particular foreign affiliate at the time of that disposition, for proceeds equal to the cost to the particular foreign affiliate of the eligible property at the time of that disposition.

• For the purpose of determining the cost of eligible property to the particular foreign affiliate in respect of the particular Canadian shareholder, and the cumulative eligible capital of the particular foreign affiliate in respect of the particular Canadian shareholder, for its taxation year that includes the status change time in respect of the particular foreign affiliate in respect of the particular Canadian shareholder and for each subsequent taxation year, in respect of each business (other than an active business) of the particular foreign affiliate in that taxation year or subsequent taxation year, the particular foreign affiliate is deemed to have acquired, immediately after the beginning of its particular taxation year that includes the status change time in respect of the particular foreign affiliate in respect of the particular Canadian shareholder, each eligible property of the particular foreign affiliate, immediately before the beginning of the particular year, in respect of each business carried on by the particular foreign affiliate that is, immediately before the beginning of the particular year, a business (other than an active business) of the particular foreign affiliate, at a cost equal to the lesser of

• "Eligible property" in respect of a business carried on by the particular foreign affiliate is a property, right or thing in respect of which the particular foreign affiliate has, after 1971 and before the status change time, made an eligible capital expenditure in respect of the business.

• For the purpose of determining, at the beginning of the particular foreign affiliate's taxation year that includes the status change time in respect of the foreign affiliate in respect of the particular Canadian shareholder, the undepreciated capital cost to the particular foreign affiliate of a depreciable capital property used or held by the particular foreign affiliate in the course of carrying on a business other than an active business of the particular foreign affiliate in that taxation year,

• For the purpose of determining the capital cost and undepreciated capital cost to the particular foreign affiliate in respect of the particular Canadian shareholder of its depreciable capital property used or held in the course of carrying on each business (other than an active business) carried on by the particular foreign affiliate, for the particular foreign affiliate's taxation year that includes the status change time in respect of the particular foreign affiliate in respect of the particular Canadian shareholder and for its subsequent taxation years, the particular foreign affiliate is deemed to have acquired, at the time that is immediately after the beginning of its taxation year that includes the status change time, each depreciable capital property (each such depreciable capital property referred to in this subparagraph and paragraph 95(2)(f.93) as a "specified depreciable property") that was owned by the particular foreign affiliate and used or held by the particular foreign affiliate, immediately before the beginning of the foreign affiliate's taxation year that includes the status change time, in the course of carrying on a business of the particular foreign affiliate other than an active business, at a capital cost equal to the lesser of

New paragraph 95(2)(f.91) applies in respect of non-resident corporations that become foreign affiliates of a particular taxpayer resident in Canada after Announcement Date.

ITA
95(2)(f.92)

New paragraph 95(2)(f.92) of the Act is consequential to new paragraph 95(2)(f.91). It provides that, in applying paragraph (a) of the description of E in the definition "cumulative eligible capital" in subsection 14(5) in respect of a particular disposition that occurs after the beginning of the taxation year of a the particular foreign affiliate that includes the status change time (defined in paragraph 95(2)(f.91)) in respect of the particular foreign affiliate in respect of the particular Canadian shareholder, (defined in paragraph 95(2)(f.91)), by the particular foreign affiliate (defined in paragraph 95(2)(f.91)) of a relevant shareholder (defined in paragraph 95(2)(f.91)), in respect of which a particular consideration (that was eligible property defined in paragraph 95(2)(f.91) that was in existence at the time immediately before the status change time was provided by the particular foreign affiliate, the particular foreign affiliate's proceeds from the particular disposition, are deemed to be the amount, if any, determined by the formula

New paragraph 95(2)(f.92) applies in respect of non-resident corporations that become foreign affiliates after Announcement Date.

ITA
95(2)(f.93)

New paragraph 95(2)(f.93) of the Act is consequential to new paragraph 95(2)(f.91). It provides that if, at any time after the beginning of the taxation year of the particular foreign affiliate (defined in paragraph 95(2)(f.91)) that includes the status change time (defined in paragraph 95(2)(f.91)) in respect of the particular foreign affiliate in respect of the particular Canadian shareholder (defined in paragraph 95(2)(f.91)), the particular foreign affiliate disposes of a particular specified depreciable property (defined in paragraph 95(2)(f.91)), the particular foreign affiliate's proceeds from the disposition of the particular specified depreciable property are deemed to be the amount, if any, determined by the formula

where

A is the particular foreign affiliate's proceeds of disposition in respect of the disposition of the particular specified depreciable property, as otherwise determined,

B is the lesser of

C is the lesser of

New paragraph 95(2)(f.93) applies in respect of non-resident corporations that become foreign affiliates after Announcement Date.

ITA
95(2)(f.94)

New paragraph 95(2)(f.94) of the Act provides that, for the purposes of paragraphs 95(2)(f.5) and (f.91) to (f.93), if the relevant foreign affiliate referred to in paragraph 95(2)(f.5) or the particular foreign affiliate referred to in any of paragraphs 95(2)(f.91) to (f.93) (in either case, the "specified foreign affiliate") has been wound up into another non-resident corporation (the "foreign parent corporation") or merged or combined with one or more other non-resident corporations to form one non-resident corporate entity (the "new foreign corporation"), the foreign parent corporation or the new foreign corporation, as the case may be, is deemed to be the same corporation as and a continuation of the specified foreign affiliate, if

• the surplus entitlement percentage of the particular corporation resident in Canada, immediately before the merger or combination or the winding-up, in respect of the specified foreign affiliate is not less than 90%, and

• the surplus entitlement percentage of the particular corporation resident in Canada, immediately after the merger or combination or the winding-up, in respect of the foreign parent corporation or new foreign corporation, as the case may be, is not less than 90%.

New paragraph 95(2)(f.94) applies after Announcement Date.

ITA
95(2)(g)

Paragraph 95(2)(g) of the Act provides that where, because of a fluctuation in the value of the currency of a country other than Canada relative to the value of Canadian currency, a foreign affiliate of a taxpayer in respect of which the taxpayer has a qualifying interest throughout a taxation year of the affiliate has earned income or incurred a loss or realized a capital gain or a capital loss in the year, in reference to certain debt and share transactions of the affiliate, the income, gain or loss, as the case may be, is nil.

Paragraph 95(2)(g) is amended to expand its scope of application to not only foreign affiliates of a taxpayer in respect of which the taxpayer has a qualifying interest throughout the taxation year, but also to foreign affiliates to which the taxpayer is related throughout the taxation year.

The amendment to paragraph 95(2)(g) applies to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002. Note that this amendment is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(g.01)

New paragraph 95(2)(g.01) of the Act deals with foreign currency hedging agreements. In general terms, that paragraph provides that a foreign currency income, gain or loss derived under or as a result of an agreement that provides for the purchase, sale or exchange of currency where the agreement can reasonably be considered to have been made by a foreign affiliate of a taxpayer to reduce the affiliate's risk (with respect to any source, any particular income, gain or loss determined in reference to which is deemed by paragraph 95(2)(g) to be nil) of fluctuations in the value of currency is, to the extent of the absolute value of the particular income, gain or loss, deemed to be nil. This amendment ensures that income, a gain or a loss from a hedge is deemed to be nil if the hedged income, loss or gain is deemed to be nil.

New paragraph 95(2)(g.01) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. Note that new paragraph 95(2)(g.01) is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(g.02)

New paragraph 95(2)(g.02) of the Act ensures that foreign exchange gains and losses of a foreign affiliate of a taxpayer determined under subsection 39(2) in respect of excluded property (as defined in subsection 95(1) of the Act) are computed separately from the affiliate's foreign exchange gains and losses in respect of other property. This amendment facilitates the computation of the foreign accrual property income and the tax surpluses and deficits of a foreign affiliate of a taxpayer.

New paragraph 95(2)(g.02) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. Note that new paragraph 95(2)(g.02) is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(h) to (h.5)

New paragraphs 95(2)(h) to (h.5) of the Act put into place a regime that, in general terms, is designed to suspend the recognition of the loss that would otherwise be incurred upon an internal disposition of a property that is not an excluded property, a depreciable property or an eligible capital property. Generally, this "suspended loss" is recognized at the time the property is disposed of in an external disposition. The rules are comparable to but not the same as the rules found in subsection 40(3.4) of the Act. See the definitions "specified vendor" and "specified purchaser" in proposed new subsection 95(3.5) to determine when a disposition is an internal disposition.

New paragraphs 95(2)(h) to (h.5) apply to dispositions of property after Announcement Date other than where the disposition of property is required to be made under a written agreement made by the vendor of the property on or before Announcement Date.

ITA
95(2)(h)

New paragraph 95(2)(h) of the Act provides that new paragraph 95(2)(h.1) applies to a specified vendor in respect of a particular taxpayer resident in Canada (see definition of "specified vendor" in subsection 95(3.5) and such specified vendor referred in here and paragraph (h.1) as the "vendor") if

• the vendor disposes at any time (referred to here and in paragraphs 95(2)(h.1) to (h.5) as the "original disposition time") of a property (referred to here and in paragraphs 95(2)(h.1) to (h.5) as the "specified property") that, at that time, is not a depreciable property, eligible capital property or an excluded property of the vendor (or would not be excluded property of the vendor if the vendor were, at that time, a foreign affiliate of the particular taxpayer) to a person or partnership (referred to here as the "purchaser") that is, immediately after that time, a specified purchaser in respect of the particular taxpayer, and

• the vendor would have a loss or an allowable capital loss from the disposition of the specified property, if this Act were read without reference to paragraph 95(2)(h.1).

The expressions "original disposition time", "specified property", "vendor" and "purchaser" are described in new paragraph 95(2)(h) and are then referred to throughout new paragraphs 95(2)(h.1) to 95(2)(h.5).

ITA
95(2)(h.1)

New paragraph 95(2)(h.1) of the Act provides the following rules for the vendor in respect of the disposition of the specified property.

• The vendor's proceeds from the disposition of the specified property are deemed to be an amount that is equal to the vendor's adjusted cost base of the specified property at the original disposition time (see paragraph 95(2)(h)).

• The purchaser's cost of the specified property is deemed to be an amount that is equal to the fair market value of the specified property at the original disposition time.

• The vendor's cost of a particular property that was received as consideration for the disposition of the specified property is deemed to be the fair market value of the particular property at the original disposition time.

• The vendor that is a foreign affiliate of the particular taxpayer or a foreign affiliate of the particular taxpayer that is a member of a partnership that is the vendor (referred to here as the "relevant foreign affiliate") is deemed to have an unadjusted suspended loss or capital loss in respect of the specified property, at the original disposition time, by the vendor that is equal to the amount, that, but for the application of this paragraph, would have been the relevant foreign affiliate's loss or twice the amount of the allowable capital loss, as the case may be, in respect of that disposition, if the vendor's proceeds of disposition in respect of that disposition were equal to the fair market value of the specified property.

• Notwithstanding subsection 40(3.3), subsection 40(3.4) does not apply to the vendor in respect of the disposition of the specified property.

ITA
95(2)(h.2)

New paragraph 95(2)(h.2) of the Act provides that the relevant foreign affiliate referred to in paragraph 95(2)(h.1) is deemed to have a loss or capital loss from the disposition of the specified property equal to the amount prescribed by regulation to be the adjusted suspended loss or capital loss (see proposed new subsection 5914(1) of the Regulations) in respect of the specified property. New paragraph 95(2)(h.2) also provides that the relevant foreign affiliate referred to in paragraph 95(2)(h.1) is deemed to have received from the government of a country an amount equal to the amount prescribed by regulation to be the adjusted allocable tax refund (see proposed new subsection 5914(2) of the Regulations) in respect of the adjusted suspended loss or capital loss in respect of the specified property. The adjusted suspended loss or capital loss and the adjusted allocable tax refund will arise at the earlier of

• the first time, after the original disposition time, that a specified purchaser (see subsection 95(3.5)) in respect of the particular taxpayer (referred to in paragraphs 95(2)(h.4) and (h.5) as the "current vendor") that holds, immediately before that first time, the specified property makes a triggering disposition (see subsection 95(3.5)) of the specified property.

• the first time, after the original disposition time, that a specified purchaser in respect of the particular taxpayer (referred to here as the "current holder") that holds, immediately before that first time, the specified property, ceases at that time to be a specified purchaser in respect of the particular taxpayer otherwise than because of a specified discontinuance (see subsection 95(3.5)) of the current holder.

ITA
95(2)(h.3)

New paragraph 95(2)(h.3) of the Act provides that for the purposes of paragraphs 95(2)(h.1), (h.2), (h.4) and (h.5) and subsection 95(3.5), a designated replacement property referred to in clause (b)(ii)(A), (B) or (C) of the definition "triggering disposition" in subsection 95(3.5) is deemed to be the same property as the specified property referred to in that clause.

ITA
95(2)(h.4)

New paragraph 95(2)(h.4) of the Act provides that for the purposes of paragraphs 95(2)(h.1) to (h.3) and (h.5) and subsection 95(3.5), where at any time, part of a specified property (referred to here as the "initial specified property") is disposed of by a current vendor and the remaining part of the specified property is retained by the current vendor, the following rules apply:

• The part (referred to here as the "part interest") of the initial specified property disposed of, at that time, shall be deemed to be a specified property of the current vendor.

• The portion of the unadjusted suspended loss or capital loss attributable to the part interest is deemed to be that proportion of the adjusted suspended loss or capital loss in respect of the whole of the initial specified property that the fair market value at that time of the part interest is of the fair market value at that time of the initial specified property. (Subparagraph 95(2)(h.4)(ii))

• The part (referred to here as the "remaining interest") of the initial specified property not disposed of at that time is deemed to be a specified property of the current vendor that was disposed of at the original disposition time.

• The amount of loss or capital loss that would have been realized on the disposition of the remaining interest at the original disposition time is deemed to be the amount, if any, by which the unadjusted suspended loss or capital loss in respect of the initial specified property exceeds the amount determined by subparagraph 95(2)(h.4)(ii) to be the unadjusted suspended loss or capital loss in respect of the part interest.

ITA
95(2)(h.5)

New paragraph 95(2)(h.5) of the Act provides that for the purposes of paragraphs 95(2)(h.1) to (h.4) and subsection 95(3.5), if a current vendor disposes, at any particular time, of the whole of a specified property (referred to here as the "initial specified property") and as part of a transaction, or series of transactions or events, that includes the disposition of the initial specified property, a specified purchaser in respect of the taxpayer acquires a designated replacement property (see the definition "triggering disposition" in subsection 95(3.5)) in respect of the initial specified property, the following rules apply:

• The designated replacement property (referred to here as "the remaining interest") is deemed to be a specified property of the current vendor that was disposed of at the original disposition time. (Subparagraph 95(2)(h.5)(i))

• The unadjusted suspended loss or capital loss in respect of the remaining interest is deemed to be that portion of the unadjusted suspended loss or capital loss in respect of the whole of the initial specified property (determined without reference to subparagraph 95(2)(h.5)(iii)) that the fair market value of the remaining interest, at the time it was acquired, is of the fair market value, at the particular time, of the initial specified property. (Subparagraph 95(2)(h.5)(ii))

• The unadjusted suspended loss or capital loss in respect of the initial specified property is deemed to be the amount, if any, by which the unadjusted suspended loss or capital loss in respect of the initial specified property (determined without reference to subparagraph 95(2)(h.5)(iii)) minus the amount determined by subparagraph 95(2)(h.5)(ii) to be the unadjusted suspended loss or capital loss in respect of the remaining interest. (Subparagraph 95(2)(h.5)(iii))

ITA
95(2)(i)

Paragraph 95(2)(i) of the Act provides a rule under which certain gains or losses (determined in accordance with subsection 39(2) of the Act) of a foreign affiliate of a taxpayer are deemed to be a gain or loss, as the case may be, from the disposition of an excluded property (as defined in subsection 95(1) of the Act) and are therefore not included in computing the affiliate's foreign accrual property income. Under this paragraph, the gain or loss that is eligible for this treatment is a gain or loss of the affiliate from the settlement or extinguishment of a debt that related at all times to the acquisition of an excluded property. This paragraph is amended in three ways.

First, it is amended so that the gain or loss from the settlement or extinguishment of a debt is eligible for this treatment if all or substantially all of the proceeds from the debt were used at all times to acquire excluded property or to earn income from an active business or a combination of those uses.

Second, it is amended to ensure that a gain or loss of a foreign affiliate is also eligible for this treatment if it is a gain or loss derived under or as a result of an agreement that provides for the purchase, sale or exchange of currency, where the agreement can reasonably be considered to have been made by the affiliate to reduce its risk (with respect to the debt) of fluctuations in the value of the currency in which the debt was denominated.

Third, it is amended so that its "preamble" contains a specific reference to gains and losses, determined in accordance with subsection 39(2) of the Act, which provides the general rules for the calculation of foreign currency gains and losses.

These amendments to paragraph 95(2)(i) clarify the relationship between paragraph 95(2)(f) and subsection 39(2) of the Act and expand the scope of paragraph 95(2)(i) so that it applies more broadly to indebtedness used to fund active business operations. It also applies to certain foreign currency hedging agreements that are related to that indebtedness.

These amendments to paragraph 95(2)(i) apply to taxation years of a foreign affiliate, of a taxpayer, that begin after December 20, 2002. Note that these amendments are part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(j.1) and (j.2)

New paragraphs 95(2)(j.1) and (j.2) of the Act ensure that a foreign affiliate of a taxpayer resident in Canada that carries on an insurance business is eligible to claim certain policy reserves in connection with an insurance business in computing its foreign accrual property income.

New paragraph 95(2)(j.1) provides that new paragraph 95(2)(j.2) applies in respect of a particular taxation year of a foreign affiliate of a taxpayer and in respect of a particular fiscal period of a partnership at the end of which a foreign affiliate of a taxpayer is a member of the partnership (which foreign affiliate or partnership is referred to as the "operator" and which particular taxation year or particular fiscal period is referred to as the "specified taxation year") if in the specified taxation year

• the operator carries on a business (referred to as a "foreign business"),

• the foreign business includes the insuring of risks,

• the foreign business is not, at any time, a "taxable Canadian business" (as newly defined in subsection 95(1) of the Act),

• the foreign business is

• in respect of the foreign business, the operator would, if it were a corporation carrying on the foreign business in Canada, be required by law to report to, and be subject to the supervision of, a regulatory authority that is the Superintendent of Financial Institutions or a similar authority of a province.

New paragraph 95(2)(j.2) provides that in computing an operator's income or loss from the foreign business for the specified taxation year and each subsequent taxation year or fiscal period in which the foreign business is carried on by the operator

• the operator is deemed to carry on the foreign business in Canada throughout that part of the specified taxation year, and of each of those subsequent taxation years or fiscal periods, in which the foreign business is carried on by the operator, and

• for the purposes of Part XIV of the Regulations,

For information about the new definition "taxable Canadian business", see the commentary to subsection 95(1).

In connection with the application of these new paragraphs, note the rule in new paragraph 95(2)(k.7). For detail, see the commentary for paragraph 95(2)(k.7).

These new paragraphs apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. These amendments are included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

Absent a Fresh Start Section 95 Election by a taxpayer resident in Canada in respect of the taxpayer's foreign affiliate, subsection 1402(2) of the Regulations (which was repealed by P.C. 1999-1154, SOR/99-269, dated June 23, 1999) ensures, if the foreign affiliate of the taxpayer resident in Canada itself is the operator, that a result similar to the result afforded the foreign affiliate by new paragraphs 95(2)(j.1) and (j.2) is afforded the foreign affiliate for the 1995 and prior taxation years of the foreign affiliate of the taxpayer resident in Canada.

ITA
95(2)(k) and (k.1)

Paragraph 95(2)(k) of the Act provides fresh start rules that, in general terms, are triggered if there is one of two types of changes to the business activities of a foreign affiliate of a taxpayer resident in Canada, namely:

• in a particular taxation year, the foreign affiliate of the taxpayer resident in Canada carries on an investment business outside Canada and, in the preceding taxation year, that business was not an investment business (as defined in subsection 95(1) of the Act) of the foreign affiliate, or

• in a particular taxation year, the foreign affiliate of the taxpayer resident in Canada is deemed by paragraph 95(2)(a.1), (a.2), (a.3) or (a.4) to carry on a separate business, other than an active business, and, in the preceding taxation year, the foreign affiliate was not deemed by that paragraph to be carrying on that separate business.

Paragraph 95(2)(k) refers to that investment business or that separate business as the "foreign business".

The fresh start rules, set out in paragraph 95(2)(k), also apply where a foreign affiliate of a taxpayer resident in Canada begins to carry on a particular business in the particular year and the particular business was an investment business of the foreign affiliate (or was comprised of activities deemed by paragraph 95(2)(a.1), (a.2), (a.3) or (a.4) to be a separate business, other than an active business, carried on by the foreign affiliate).

These fresh start rules apply for the purpose of computing the foreign accrual property income (FAPI), of a foreign affiliate of a taxpayer resident in Canada in respect of the taxpayer, from a foreign business for a particular taxation year of the foreign affiliate and for each subsequent taxation year in which the foreign business is considered to be carried on. In general terms, the fresh start rules provide for the following in computing the foreign affiliate's FAPI in respect of the taxpayer from the foreign business for those years:

• The foreign affiliate is deemed to have begun to carry on the foreign business in Canada at the later of the time the particular taxation year began and the time the foreign affiliate began carrying on the foreign business. The foreign affiliate is also deemed to have carried on the foreign business in Canada throughout that part of the particular taxation year and each subsequent taxation year in which the foreign business is considered to be carried on by the foreign affiliate.

• Where the foreign business is a business in respect of which the foreign affiliate would, if the foreign business were carried on in Canada, be required by law to report to a regulating authority such as the federal Superintendent of Financial Institutions or a similar authority of a province, the foreign affiliate is deemed to have been subject to the supervision of such a regulating authority.

• Paragraphs 138(11.91)(c) to (f) of the Act apply to the foreign affiliate in respect of the foreign business as if the foreign affiliate were the insurer referred to in subsection 138(11.91), the particular taxation year were the particular year referred to in those paragraphs and the foreign business were the business of the insurer referred to in those paragraphs.

The fresh start rules in subparagraph 95(2)(k) ensure that the income of the foreign affiliate from the foreign business is calculated using Canadian tax rules. For example, the rule deeming the foreign affiliate to be subject to the supervision of a regulating authority permits the foreign affiliate to claim certain reserves in respect of insurance policies in connection with the foreign business. As well, there is a deemed disposition and reacquisition of property used or held in the foreign business immediately before the beginning of the particular taxation year. The fresh start rules ensure that income or losses accruing in prior periods do not enter into the income calculations for the foreign business in the particular taxation year or in subsequent taxation years.

A number of amendments are made to these fresh start rules. Note that paragraph 95(2)(k) is being divided into amended paragraph 95(2)(k) and new paragraph 95(2)(k.1). Amended paragraph 95(2)(k) defines the circumstances to which the fresh start rules apply, and new paragraph 95(2)(k.1) contains the substantive provisions of the fresh start rules.

Amended paragraph 95(2)(k) provides that new paragraph 95(2)(k.1) applies in respect of a particular taxation year of a foreign affiliate of a taxpayer resident in Canada and in respect of a particular fiscal period of a partnership at the end of which a foreign affiliate of a taxpayer resident in Canada is a member of the partnership (which foreign affiliate or partnership is referred to as the "operator" and which particular taxation year or particular fiscal period is referred to as the "specified taxation year") if the following four conditions are met:

• in the specified taxation year, the operator carries on a business (referred to in amended paragraph 95(2)(k) and, subject to new paragraph 95(2)(k.6), in new paragraph 95(2)(k.1), as a "foreign business"),

• the foreign business is not, at any time in the specified taxation year, a "taxable Canadian business",

• in the specified taxation year, the foreign business is

• in the taxation year of the foreign affiliate, or fiscal period of the partnership, that includes the day that is immediately before the beginning of the specified taxation year)

In connection with the first of these conditions, see the commentary to new subparagraph 95(2)(k.6).

New paragraph 95(2)(k.1) provides that, in computing the operator's income or loss from the foreign business, and in computing the operator's capital gain or capital loss from the disposition of property used or held in the course of carrying on the foreign business, for the specified taxation year and each subsequent taxation year or fiscal period in which the foreign business is carried on by the operator,

• the operator is deemed

• where, in respect of the foreign business, the operator would, if it were a corporation carrying on the foreign business in Canada, be required by law to report to, and be subject to the supervision of, a regulatory authority that is the Superintendent of Financial Institutions or a similar authority of a province,

• paragraphs 138(11.91)(c) to (e) of the Act apply to the operator for the specified taxation year in respect of the foreign business as if

• if a particular property is deemed, because of the application of subparagraph 95(2)(k.1)(iii) and paragraph 138(11.91)(e), to have been disposed of in the preceding taxation year by the operator (which disposition is referred to in this subparagraph as a "particular disposition" of the particular property),

In general terms, the amendments to paragraphs 95(2)(k) and (k.1) can be summarized as follows:

First, the amendments ensure that the fresh start rules apply not only if the particular business is carried on by a foreign affiliate of a taxpayer resident in Canada, but also if the particular business is carried on by a partnership of which a foreign affiliate of a taxpayer resident in Canada is a member. These amendments ensure, in the case of partnerships, that the fresh start rules will work on the basis of fiscal periods of the partnership and will therefore be relevant in the computation of the foreign affiliate 's foreign accrual property income for the foreign affiliate's taxation year that includes a fiscal period to which the fresh start rules apply. In amended paragraph 95(2)(k) and new paragraph 95(2)(k.1), the expression "operator" refers to the foreign affiliate (if the foreign affiliate directly carries on the particular business) or to the partnership (if the foreign affiliate carries on the particular business through the partnership).

Second, the amendments ensure that the fresh start rules are no longer triggered if the operator begins to carry on the particular business in the specified taxation year and did not carry on the particular business in the preceding taxation year. However, it is possible that, in such a situation, new paragraphs 95(2)(j.1) and (j.2) may apply. For further detail, see the commentary to new paragraphs 95(2)(j.1) and (j.2).

Third, the amendments ensure that the type of change in business activities that triggers the fresh start rules is a change that meets the following conditions:

• in the specified taxation year, the operator carries on a business (a "foreign business"),

• in the specified taxation year, the foreign business is

• in the preceding taxation year or fiscal period, the foreign affiliate or the partnership carried on the foreign business, and

• in that preceding taxation year or fiscal period, the foreign business was not described in any of clauses 95(2)(k)(iii)(A), (B) and (C).

Fourth, new paragraph 95(2)(k) provides that, in order for the fresh start rules to be triggered, the foreign business of the operator

• cannot, at any time in the specified taxation year, be a taxable Canadian business of the operator, and

• cannot, at any time in the preceding taxation year or fiscal period, have been a taxable Canadian business of the foreign affiliate or the partnership.

For more detail, see the commentary to the new definition "taxable Canadian business" in subsection 95(1) of the Act.

Fifth, new paragraph 95(2)(k.1) provides that life insurance policies issued by a foreign business of a foreign affiliate of a taxpayer resident in Canada in the conduct of that business are deemed to be life insurance policies in Canada if

• the operator would be required by law to report to the Superintendent of Financial Institutions or to a similar authority of a province in respect of the foreign business if the operator were a corporation carrying on the foreign business,

• the foreign business is a life insurance business, and

• the operator is a life insurer.

This new rule ensures that the operator is eligible to claim certain policy reserves in connection with the life insurance business.

Sixth, new paragraph 95(2)(k.1) makes it clear that, in applying paragraph 138(11.91)(e) of the Act to the fresh start rules, the reference in paragraph 138(11.91)(e) to "property owned by it at that time that is designated insurance property in respect of the business" is to be read as a reference to "property owned or held by it at that time that is used or held by the insurer in the particular taxation year in the course of carrying on the insurance business".

Seventh, consequential to the repeal of paragraph 138(11.91)(f) of the Act, the reference, in the fresh start rules, to "paragraphs 138(11.91)(c) to (f)" is changed to read "paragraphs 138(11.91)(c) to (e)". For more detail, see the commentary to subsection 138(11.91).

Eighth, subparagraph 95(2)(k.1)(iv) provides that the income, gain or loss from the deemed disposition of a particular property under subparagraph 95(2)(k.1)(iii) is only to be included in computing the foreign affiliate's income, gain or loss in the taxation year in which the property is disposed of in a transaction other than the deemed disposition. The recognition of foreign income tax recoveries paid or recovered that is related to the deferred income, gain or loss is to matched with the recognition of that income, gain or loss.

New paragraphs 95(2)(k) and (k.1) apply to taxation years of foreign affiliates of a taxpayer resident in Canada that begin after December 20, 2002. These amendments are included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

However, note that this set of proposals sets out a number of transitional rules with respect to the application of paragraphs 95(2)(k) and (k.1).

First, in applying new paragraph 95(2)(k.1) for taxation years, of a foreign affiliate of the taxpayer, that begin on or before Announcement Date, that paragraph is to be read without reference to subparagraph 95(2)(k.1)(iv).

Second, in the case where the taxpayer has made a valid Fresh Start Section 95 Election, in applying new clause 95(2)(k)(iv)(C) of the Act, for taxation years, of all foreign affiliates of the taxpayer, that begin before December 21, 2002, that clause is to be read in respect of those affiliates as follows:

Third, in applying existing subparagraph 95(2)(k)(iv) of the Act to taxation years, of foreign affiliates of a taxpayer, that end after 1999 and begin before December 21, 2002, that subparagraph is, unless the taxpayer makes a valid Fresh Start Section 95 Election, to be read as follows:

Example

Facts

Forco, a wholly-owned foreign affiliate of Canco, is deemed to carry on an investment business. The principal purpose of Forco's business is to derive income from trading or dealing in securities. The particular taxation year of Forco in respect of which paragraphs 95(2)(k) and (k.1) apply to the investment business is its taxation year ended December 31, 1995 (its "1995 taxation year"). Forco had acquired only one security for $10 million. The fair market value of the security was $12 million at the end of its taxation year that ended on December 31, 1994 (its "1994 taxation year"). Assume, for the purposes of this example, that Canco has made a valid Fresh Start Section 95 Election.

Application of paragraphs 95(2)(k) and (k.1)

Forco is deemed to have, at the end of its 1994 taxation year, disposed of all the securities used or held by it in respect of the investment business. The amount of $2 million (i.e., $12 million minus $10 million) would be added to the "earnings" of Forco in the taxation year in which it disposed of the securities. Following the deemed reacquisition of the securities at the beginning of its 1995 taxation year, Forco would have $12 million as the cost of its securities for the purposes of computing its income from the investment business. For additional detail, refer to the commentary to subsection 5907(2.9) of the Regulations.

ITA
95(2)(k.2) and (k.3)

New paragraphs 95(2)(k.2) and (k.3) of the Act operate together and, in general terms, provide for fresh start rules that are triggered if a business carried on that is not an active business of a foreign affiliate of a taxpayer resident in Canada (or a business of a partnership of which the foreign affiliate is a member) becomes, in a particular taxation year of the foreign affiliate or in a particular fiscal period of the partnership (as the case may be), an active business. These fresh start rules apply in computing the foreign affiliate's foreign accrual property income (FAPI) in respect of the taxpayer from that business for the preceding taxation year or fiscal period.

Paragraph 95(2)(k.2) provides that paragraph 95(2)(k.3) applies in respect of a particular taxation year of a foreign affiliate of a taxpayer or in respect of a particular fiscal period of a partnership at the end of which a foreign affiliate of a taxpayer is a member of the partnership (which foreign affiliate or partnership is referred to as the "operator" and which particular taxation year or particular fiscal period is referred to as the "specified taxation year") if the following four conditions are met:

• in the preceding taxation year of the foreign affiliate or fiscal period of the partnership (which taxation year or fiscal period is referred to in this paragraph and paragraph (k.3) as the "preceding taxation year") that includes the day immediately before the beginning of the specified taxation year, the foreign affiliate or the partnership carried on a business (which is referred to in paragraph 95(2)(k.2) and, subject to paragraph (k.6), in paragraph 95(2)(k.3), as the "foreign business"),

• the foreign business was not, at any time in the preceding taxation year, a "taxable Canadian business",

• in the preceding taxation year, the foreign business was

• either

In connection with the first of these four conditions, see the commentary on new subparagraph 95(2)(k.6).

For detail on the new definition "taxable Canadian business", see the commentary to subsection 95(1) of the Act.

The fresh start rules in paragraph 95(2)(k.3) provide that, in computing the operator's income or loss from the foreign business and in computing the operator's capital gain or capital loss from the disposition of property used or held in the course of carrying on the foreign business, for the preceding taxation year or fiscal period referred to in paragraph 95(2)(k.2) and for the specified taxation year of the operator and the operator's subsequent taxation years or fiscal periods,

• the operator is deemed to have ceased to carry on the foreign business in Canada at the beginning of the specified taxation year, and

• subject to subparagraph 95(2)(k.3)(iii), paragraphs 138(11.91)(c) to (e) of the Act apply to the operator for the specified taxation year in respect of the foreign business as if

Paragraphs 95(2)(k.2) and (k.3) ensure that, if a foreign business that is an active business in the specified taxation year was not an active business in the immediately preceding taxation year or fiscal period, as the case may be, any accrued gains will be included in computing the FAPI of the foreign affiliate in that preceding taxation year or fiscal period. The active business income of the foreign affiliate will reflect income, gains and losses accruing in the specified taxation year and in subsequent taxation years or fiscal periods, as the case may be. The reference, in subsection 95(2)(k.3), to paragraphs 138(11.91)(c) to (e), ensures that, immediately before the beginning of the specified taxation year, there is a deemed disposition and deemed reacquisition of property used or held in the foreign business.

New paragraphs 95(2)(k.2) and (k.3) apply to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002. However, this set of proposals provides that, in applying new paragraph 95(2)(k.2) for taxation years, of a foreign affiliate of the taxpayer, that begin on or before Announcement Date, that paragraph is to be read without reference to subclause 95(2)(k.2)(iv)(A)(II).

Example

Facts

Forco, a wholly-owned foreign affiliate of Canco, carried on a particular business that was an investment business throughout its taxation year that ended December 31, 2004. Forco is resident in a country that is a designated treaty country for the purposes of Part LIX of the Regulations. In its taxation year that ended December 31, 2005 (its "2005 taxation year"), business activities constitute an active business.

At the end of its 2004 taxation year, Forco owned capital property with a cost amount of $6 million, and inventory with a cost amount of $2 million, that was property used or held in the course of carrying on this business. At the end of that taxation year, the fair market value of Forco's capital property was $10 million and the fair market value of its inventory was $4 million.

Application of paragraphs 95(2)(k.2) and

(k.3)

Forco would be deemed to have, immediately before the end of its 2004 taxation year, disposed of all of its property for proceeds equal to fair market value of that property at that time.

In connection with the deemed disposition of the capital property, Forco would be deemed to have a capital gain of $4 million (i.e., $10 million minus $6 million). Therefore, the taxable capital gain would be $2 million. Subject to a taxpayer election described below, the $2 million of taxable capital gains will be included in computing Forco's FAPI for the 2004 taxation year. Following the deemed reacquisition of the capital property at the end of its 2004 taxation year, Forco would have a cost in the amount of $10 million for the capital property.

Subject to a taxpayer election described below, in connection with the deemed disposition of the inventory, Forco would be deemed to have income of $2 million that would be included in computing the foreign accrual property income of Forco for its 2004 taxation year. Following the deemed reacquisition of the inventory at the end of its 2004 taxation year, Forco would have a cost in the amount of $4 million for the inventory.

For fresh starts in taxation years of a foreign affiliate of a taxpayer resident in Canada commencing after December 20, 2002, where the taxpayer elects (subparagraph 95(2)(k.3)(iv)), the gain and income arising because of the application of paragraph 95(2)(k.3) can be recognized by the foreign affiliate in the year the property is disposed of by foreign affiliate in a disposition other a disposition deemed, because of the application of subparagraph 95(2)(k.3)(ii) and paragraph 138(11.91)(e), to have occurred.

ITA
95(2)(k.4)

The fresh start rules provided for in new paragraphs 95(2)(k) and (k.1) and in new paragraphs 95(2)(k.2) and (k.3), respectively, of the Act do not apply to a business the income from which is subject to tax under Part I of the Act. New paragraph 95(2)(k.4) provides for a rule to deal with the situation where income from part of the business is subject to tax under Part I of the Act.

New paragraph 95(2)(k.4) provides that, if at any time a foreign affiliate of a taxpayer resident in Canada, or a partnership at the end of the fiscal period of which includes that time a foreign affiliate of a taxpayer resident in Canada is a member of the partnership, (which foreign affiliate or partnership is referred to as the "operator"), carries on a business both outside Canada and in Canada and income from that particular part of that business that is carried on in Canada is income from a taxable Canadian business, the following rules apply for the purposes of paragraphs 95(2)(k) to (k.3):

• the particular part of the business is deemed to be, at that time, a separate business,

• the assets used, or held, at that time primarily in the course of carrying on the particular part of the business are deemed to be, at that time, used or held in the course of carrying on the separate business,

• any liability incurred, and any reserve established, at that time in the course of carrying on the particular part of the business are deemed to be, at that time, incurred or established in the course of carrying on the separate business, and

• the transactions conducted at that time in the particular part of the business are deemed to be transactions conducted, at that time, in the separate business.

New paragraph 95(2)(k.4) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. This new paragraph is included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(k.5) and (k.6)

New paragraph 95(2)(k.6) of the Act, in combination with new paragraph 95(2)(k.5), provides application rules for the purposes of new paragraphs 95(2)(k.1) and (k.3).

New paragraph 95(2)(k.5) provides that new paragraph 95(2)(k.6) applies for the purpose of paragraphs 95(2)(k.1) and (k.3) in respect of a particular business of an operator if

• the particular business is the operator's foreign business for that specified or preceding taxation year, and

• the activities of the particular business for that specified or preceding taxation year include particular activities deemed by any of paragraphs 95(2)(a.1) to (b) to be a separate business, other than an active business, carried on by the foreign affiliate and the particular activities were not all the activities of the particular business in that specified or preceding taxation year.

New subparagraph 95(2)(k.6) provides that, in applying paragraphs 95(2)(k.1) and (k.3),

• the part of the particular business that consists of activities deemed by any of paragraphs 95(2)(a.1) to (b) to be a separate business, other than an active business, carried on by the foreign affiliate for a taxation year or fiscal period referred to in paragraph 95(2)(k.1) or (k.3), of the operator, is deemed to be the operator's foreign business carried on in that taxation year or fiscal period (subparagraph 95(2)(k.6)(i)),

• the assets used or held by the operator primarily in the course of carrying on activities deemed by any of paragraphs 95(2)(a.1) to (b) to be a separate business, other than an active business, carried on by the foreign affiliate for a taxation year or fiscal period, referred to in paragraph 95(2)(k) or (k.2), of the operator, are deemed to be assets used or held by the operator in the course of carrying on the foreign business in that taxation year or fiscal period (subparagraph 95(2)(k.6)(ii)),

• the portion of the liabilities incurred and the portion of the reserves established, in the course of carrying on activities deemed by any of paragraphs 95(2)(a.1) to (b) to be a separate business, other than an active business, carried on by the foreign affiliate for a taxation year or fiscal period, referred to in paragraph 95(2)(k) or (k.2), of the operator, are deemed to be liabilities incurred and reserves established in the course of carrying on the foreign business in that taxation year or fiscal period (subparagraph 95(2)(k.6)(iii)), and

• subject to subparagraphs 95(2)(k.6)(ii) and (iii), the transactions conducted in the course of carrying on activities deemed by any of paragraphs (a.1) to (b) to be a separate business, other than an active business, carried on by the foreign affiliate for a taxation year or fiscal period, referred to in paragraph 95(2)(k) or (k.2), of the operator, are, to the extent that those transactions relate to those activities, deemed to be transactions conducted in the course of carrying on the foreign business in that taxation year or fiscal period (subparagraph 95(2)(k.6)(iv)).

New paragraphs 95(2)(k.5) and (k.6) apply to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. These new paragraphs are included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(k.7)

New paragraph 95(2)(k.7) of the Act contains rules for the purposes of applying paragraphs 95(2)(a.1) to (b), (j.1) and (j.2), (k) to (k.6) and (l) and the definition "taxable Canadian business" in subsection 95(1).

This new paragraph provides that, if a person is (or is deemed by that paragraph to be) a member of a partnership and that partnership is a member of another partnership,

Note that these deeming rules do not deem the actual or previously-deemed member not to be a member, nor do they deem such a member not to have the share of the income or loss.

New paragraph 95(2)(k.7) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. This new paragraph is included in the Fresh Start Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(l)

Paragraph 95(2)(l) of the Act includes in the income, of a foreign affiliate of a taxpayer, from property the affiliate's income derived from a business the principal purpose of which is to derive income from trading or dealing in certain indebtedness. Where the business of the affiliate is described in subparagraph 95(2)(l)(iii) and the taxpayer is described in subparagraph 95(2)(l)(iv), paragraph 95(2)(l) does not apply to the affiliate.

Subparagraph 95(2)(l)(iii) refers to a business that is carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated in the country under whose laws the affiliate was formed or continued and exists and is governed and in which the business is principally carried on.

Subparagraph 95(2)(l)(iii) is amended to refer to a business that is carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated under the laws

• of each country in which the business is carried on through a permanent establishment (as defined by proposed new section 8202 of the Regulations) in that country and of the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued,

• of the country in which the business is principally carried on, or

• if the affiliate is related to a non-resident corporation, of the country under whose laws that non-resident corporation is governed and any of exists, was (unless that non-resident corporation was continued in any jurisdiction) formed or organized, or was last continued, if those regulating laws are recognized under the laws of the country in which the business is principally carried on and all of those countries are members of the European Union.

Amended subparagraph 95(2)(l)(iii) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999.

ITA
95(2)(n)

Paragraph 95(2)(a) of the Act includes, in computing the income from an active business for a taxation year of a foreign affiliate of a taxpayer resident in Canada in respect of which the taxpayer has a "qualifying interest" throughout the year, certain amounts (described in the various subparagraphs of paragraph 95(2)(a)) that would otherwise be the foreign affiliate's income from property.

For example, subparagraph 95(2)(a)(ii) deals with the situation where the foreign affiliate derives income from certain amounts paid or payable to it by another foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest throughout the year (or from a partnership of which that other foreign affiliate is a member at the end of the year).

Paragraph 95(2)(m) determines whether a taxpayer has a "qualifying interest" in respect of a non-resident corporation that is a foreign affiliate of the taxpayer. This paragraph will not apply if the non-resident corporation is not a foreign affiliate of the taxpayer.

New paragraph 95(2)(n) accommodates a wider variety of corporate structures where the taxpayer has an indirect interest in a non-resident corporation.

New paragraph 95(2)(n) provides that, in applying paragraphs 95(2)(a) and (g) and subsections 95(2.2) and (2.21) and in applying paragraph (d) of the definition "exempt earnings", and paragraph (c) of the definition "exempt loss", in subsection 5907(1) of the Regulations, a non-resident corporation is deemed to be, at any time, a foreign affiliate of a particular corporation resident in Canada, and a foreign affiliate of the particular corporation resident in Canada in respect of which the particular corporation resident in Canada has a qualifying interest, if at that time

• the non-resident corporation is a foreign affiliate of another corporation that is resident in Canada and that is related (otherwise than because of a right referred to in paragraph 251(5)(b) of the Act) to the particular corporation, and

• that other corporation has a qualifying interest in respect of the non-resident corporation.

New paragraph 95(2)(n) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. Where the taxpayer elects in writing and files the election with the Minister of National Revenue on or before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day on which these amendments are assented to, this new paragraph applies to the taxation years, of all foreign affiliates of the taxpayer, that begin after 1994.

Facts:

1. Canco1 is a corporation resident in Canada.

2. FA1 is a non-resident corporation. Canco1 owns all of the issued and outstanding shares in FA1.

3. Canco2 is a corporation resident in Canada. Canco1 owns all of the issued and outstanding shares in Canco2.

4. FA2 is a non-resident corporation. Canco2 owns all of the issued and outstanding shares of FA2.

Application of paragraph 95(2)(n):

In the absence of paragraph 95(2)(n), FA1 would not be a "foreign affiliate of Canco2 in respect of which Canco2 has a qualifying interest" because FA1 is not a foreign affiliate of Canco2 within the meaning of the definition "foreign affiliate" in subsection 95(1). Paragraph 95(2)(m) is of no assistance in this regard. Thus, income derived by FA2 from amounts paid or payable to it by FA1 could not satisfy subparagraph 95(2)(a)(ii) in respect of Canco2.

Under paragraph 95(2)(n), and only for the limited purposes outlined in paragraph 95(2)(n), FA1 is deemed to be a foreign affiliate of Canco2 and is deemed to be a foreign affiliate of Canco2 in respect of which Canco2 has a qualifying interest because

• Canco1 and Canco2 are related,

• FA1 is a foreign affiliate of Canco1, and

• Canco1 has, because of paragraph 95(2)(m), a qualifying interest in respect of FA1.

ITA
95(2)(o)

ew paragraph 95(2)(o) of the Act defines the expression "qualifying member" of a partnership. This new definition is relevant for the amended definition "investment business" in subsection 95(1) and for amended subparagraph 95(2)(a)(ii). For more detail, see the commentaries to subsection 95(1) and paragraph 95(2)(a).

The definition "qualifying member" in paragraph 95(2)(o) is also the basis for the new definition "qualifying member" in subsection 248(1). That definition is relevant for the purpose of the new definition "exempt earnings" in new subsection 5907(1) of the Regulations. For more detail, see the commentary to subsection 248(1) of the Act and subsection 5907(1) of the Regulations.

New paragraph 95(2)(o) provides that a particular person is a "qualifying member" of a partnership at a particular time if, at the particular time, the particular person is a member of the partnership and

• throughout the period, in the fiscal period of the partnership that includes the particular time, during which the member is a member of the partnership, the particular person is, on a regular, continuous and substantial basis

• throughout the period, in the fiscal period of the partnership that includes the particular time, during which the member was a member of the partnership

New paragraph 95(2)(q) provides look-through rules that apply where partnership interests in a partnership are owned by another partnership or by a "non-discretionary trust" (within the meaning assigned by subsection 17(15) of the Act). See the commentary to paragraph 95(2)(q) for more detail.

New paragraph 95(2)(o) applies to taxation years that end after 1999. New paragraph 95(2)(o) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(p)

New paragraph 95(2)(p) of the Act provides a definition for the expression "qualifying shareholder" of a corporation. This new expression is relevant for the amended definition "investment business" in subsection 95(1) of the Act. For more detail, see the commentary for the amendments to that definition.

New paragraph 95(2)(p) provides that a particular person is a "qualifying shareholder" of a corporation at any time if throughout the period, in the taxation year of the corporation that includes that time, during which the particular person is a shareholder of the corporation,

• the particular person owns 1% or more of the issued and outstanding shares (having full voting rights under all circumstances) in the corporation,

• the particular person, or the particular person and persons (other than trusts) related to the particular person, own 10% or more of the issued and outstanding shares (having full voting rights under all circumstances) in the corporation,

• the total of the fair market value of all the issued and outstanding shares of the corporation owned by the particular person is 1% or more of the total fair market value of all the issued and outstanding shares in the corporation, and

• the total of the fair market value of all the issued and outstanding shares of the corporation owned by the particular person or by persons (other than trusts) related to the particular person is 10% or more of the total fair market value of all the issued and outstanding shares in the corporation.

New paragraph 95(2)(q) provides look-through rules that apply if shares in the corporation are owned by a partnership or by a "non-discretionary trust" (within the meaning assigned by subsection 17(15) of the Act). See the commentary to paragraph 95(2)(q) for more detail.

New paragraph 95(2)(p) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. New paragraph 95(2)(p) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(q)

New paragraph 95(2)(q) of the Act provides look-through rules for the purposes of

• applying new paragraph 95(2)(o) if partnership interests in the partnership referred to in paragraph 95(2)(o) are owned by another partnership or by a "non-discretionary trust" (within the meaning assigned by subsection 17(15) of the Act), and

• applying new paragraph 95(2)(p) if shares in the corporation referred to in paragraph 95(2)(p) are owned by a partnership or by such a "non-discretionary trust".

New paragraph 95(2)(q) provides that, in applying paragraphs 95(2)(o) and (p),

• if interests in a partnership or shares of a corporation (such interests or shares referred to as "equity interests") are, at any time, property of a partnership or are deemed by paragraph 95(2)(q) to be, at any time, property of the partnership, the equity interests are deemed to be owned at that time by each member of the partnership in a proportion equal to the proportion of the equity interests that

• if interests in a partnership or shares of a corporation (which interests or shares are referred to as "equity interests") are, at any time, property of a non-discretionary trust (within the meaning assigned by subsection 17(15)) or are deemed under paragraph 95(2)(q) to be, at any time, property of a non-discretionary trust, the equity interests are deemed to be owned at that time by each beneficiary under that trust in a proportion equal to that proportion of the equity interests that

New paragraph 95(2)(q) applies to taxation years that end after 1999. New paragraph 95(2)(q) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

ITA
95(2)(r)

New paragraph 95(2)(r) of the Act provides that, in applying paragraph 95(2)(a), a partnership is deemed to be, at any time, a partnership of which a foreign affiliate - of a particular corporation resident in Canada and in respect of which foreign affiliate the particular corporation has a qualifying interest - is a qualifying member if, at that time,

• a particular foreign affiliate, of another corporation that is resident in Canada and that is related (otherwise than because of a right referred to in paragraph 251(5)(b)) to the particular corporation, is a member of the partnership,

• that other corporation resident in Canada has a qualifying interest in respect of the particular foreign affiliate, and

• the particular foreign affiliate is a qualifying member of the particular partnership.

New paragraph 95(2)(r) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. Note that new paragraph 95(2)(r) is part of the Global Section 95 Election package described at the beginning of the commentary to section 95.

Example

Facts

1. Canco owns all the shares of Cansub.

2. Cansub owns all the shares of FA1.

3. FA1 is a "qualifying member" (as defined in paragraph 95(2)(o)) of the partnership "P".

4. Canco owns all the shares of FA2.

Application of Paragraph 95(2)(r)

Partnership P is deemed to be a partnership of which FA2 (the particular foreign affiliate) is a qualifying member because:

• Canco (the particular corporation) has a qualifying interest in FA2 (condition in "preamble" to 95(2)(r)),

• FA1 (the particular foreign affiliate) is a member of P (condition in subparagraph 95(2)(r)(i));

• FA1 is a foreign affiliate of Cansub, which is a corporation resident in Canada that is related to Canco (condition in subparagraph 95(2)(r)(i)),

• Cansub has a qualifying interest in FA1 (condition in subparagraph 95(2)(r)(ii)), and

• FA1 is a qualifying member of P (condition in subparagraph 95(2)(r)(iii)).

ITA
95(2)(s)

New paragraph 95(2)(s) of the Act provides that, in applying the definition "investment business" in subsection 95(1), a particular corporation is, at any time, a designated corporation in respect of a foreign affiliate of a taxpayer if, at that time,

• a qualifying shareholder of the foreign affiliate or a person related to such a qualifying shareholder is a qualifying shareholder of the particular corporation,

• the particular corporation

• the total of all amounts each of which is the fair market value of a share of the capital stock of the particular corporation owned by a qualifying shareholder of the foreign affiliate or by a person related to a qualifying shareholder of the foreign affiliate is greater than 50% of the total fair market value of all the issued and outstanding shares of the capital stock of the particular corporation.

New paragraph 95(2)(s) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. Note that this new paragraph is included in the Global Section 95 Election package described in the beginning of the commentary to section 95.

Example

Facts

Application of Paragraph 95(2)(s)

Corporation 3 (the particular corporation) is a designated corporation in respect of FA1 because

• Corporation 1 is related to Corporation 2 and is a qualifying shareholder of Corporation 3, and

• Corporation 3 would be controlled by Corporation 2 if Corporation 2 owned each share of Corporation 3 that is owned by Corporation 1, and

• Corporation 1 owns shares that represent more than 50% of the fair market value of all issued shares of Corporation 3.

ITA
95(2)(t)

New paragraph 95(2)(t) of the Act provides that, in applying the definition "investment business" in subsection 95(1), a particular partnership is, at any time, a designated partnership in respect of a foreign affiliate of a taxpayer if, at that time,

• the foreign affiliate or a person related to the foreign affiliate is a qualifying member of the particular partnership, and

• the total of all amounts each of which is the fair market value of a partnership interest in the particular partnership held by the foreign affiliate, by a person related to the foreign affiliate or by a qualifying member of the operating partnership (described in the investment business definition) is greater than 50% of the total fair market value of all partnership interests in the particular partnership owned by all members of the particular partnership.

New paragraph 95(2)(t) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. Note that this new paragraph is included in the Global Section 95 Election package described in the beginning of the commentary to section 95.

ITA
95(2)(u)

New paragraph 95(2)(u) of the Act provides that, in applying the definition "controlled foreign affiliate" in subsection 95(1), shares of the capital stock of a corporation, that are at any time owned by, or that are deemed by subsection 95(2) to be at any time owned by, another corporation, are deemed to be, at that time, owned by, or property of, as the case may be, each shareholder of the other corporation in the proportion that

• the fair market value at that time of the shares of the capital stock of the other corporation that, at that time, are owned by, or are property of, the shareholder

• the fair market value at that time of all the issued and outstanding shares of the capital stock of the other corporation.

Note that this deeming rule does not deem the actual or previously-deemed owner not to own the shares.

See the commentary to the definition "controlled foreign affiliate" for details about amendments to that definition.

New paragraph 95(2)(u) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after Announcement Date.

ITA
95(2)(v)

New paragraph 95(2)(v) of the Act provides that, in applying the definition "controlled foreign affiliate" in subsection 95(1), shares of the capital stock of a corporation that are, or are deemed by subsection 95(2) to be, at any time, property of a partnership, are deemed to be, at that time, owned by, or property of, as the case may be, each member of the partnership in the proportion that

• the fair market value at that time of the member's partnership interest in the partnership

• the fair market value at that time of all partnership interests in the partnership.

Note that this deeming rule does not deem the actual or previously-deemed owner not to own the shares.

See the commentary to the definition "controlled foreign affiliate" for details about amendments to that definition.

New paragraph 95(2)(v) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after Announcement Date.

ITA
95(2)(w)

New paragraph 95(2)(w) of the Act provides that, in applying the definition "controlled foreign affiliate" in subsection 95(1), shares of the capital stock of a corporation, that are at any time owned by, or that are deemed by subsection 95(2) to be at any time owned by, a non-discretionary trust (within the meaning assigned by subsection 17(15)) other than an exempt trust (within the meaning assigned by subsection 95(3.2)) are deemed to be, at that time, owned by, or property of, as the case may be, each beneficiary of the trust in the proportion that

• the fair market value at that time of the beneficiary's beneficial interest in the trust

is of

• the fair market value at that time of all beneficial interests in the trust.

Note that this deeming rule does not deem the actual or previously-deemed owner not to own the shares.

See the commentary to the definition "controlled foreign affiliate" for details about amendments to that definition.

New paragraph 95(2)(w) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after Announcement Date.

ITA
95(2)(x)

New paragraph 95(2)(x) of the Act provides that, in applying the definition "controlled foreign affiliate" in subsection 95(1), all of the shares of the capital stock of a corporation, that are owned at any time by, or deemed by subsection 95(2) to be owned at any time by, a particular trust (other than an exempt trust within the meaning assigned by subsection 95(3.2) or a non-discretionary trust within the meaning assigned by subsection 17(15)), are deemed to be, at that time, owned by, or property of, as the case may be,

Note that this deeming rule does not deem the actual or previously-deemed owner not to own the shares.

See the commentary to the definition "controlled foreign affiliate" for details about amendments to that definition.

New paragraph 95(2)(x) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after Announcement Date.

ITA
95(2)(y)

New paragraph 95(2)(y) of the Act provides that, in new paragraphs 95(2)(c.3), (f.5) and (h.2) and new clauses 95(2)(k.1)(iv)(B) and (k.3)(iii)(B), the expression "government of a country" includes the government of a province, state or other political subdivision of that country.

New paragraph 95(2)(y) applies after December 20, 2002.

Rule for Definition "investment business"

ITA
95(2.1)

Subsection 95(2.1) of the Act provides a rule for the purpose of the arm's length test in paragraph (a) of the definition "investment business" in subsection 95(1). Under this rule, a foreign affiliate of a taxpayer, the taxpayer and, in certain circumstances, a regulated financial institution in Canada of which the taxpayer is a subsidiary wholly-owned corporation, are considered to be dealing with each other at arm's length in respect of the entering into (and the execution of) agreements that provide for the purchase or sale, or exchange, of currency where all four of the conditions specified in paragraphs 95(2.1)(a) to (d) are satisfied.

The first condition, as specified in paragraph 95(2.1)(a), is that the taxpayer be (or be a corporation all of the issued shares of which are owned by a corporation that is) a bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities, the business activities of which are by law subject to the supervision of the Superintendent of Financial Institutions or a similar provincial authority.

The second condition, as specified in paragraph 95(2.1)(b), is that the agreements be swap agreements, forward purchase or sale agreements, forward rate agreements, futures agreements, options or rights agreements or similar agreements.

The third condition, as specified in paragraph 95(2.1)(c), is that the foreign affiliate entered into the agreements in the course of a business carried on principally with arm's length persons in the country in which the affiliate was formed (or continued) and exists and is governed, and in which the business is principally carried on by it.

The fourth condition, as specified in paragraph 95(2.1)(d), is that the terms and conditions of the sale or exchange be arm's length terms and conditions.

Subsection 95(2.1) permits a foreign affiliate of a taxpayer to deal with Canadian financial institutions in currency transactions entered into in the course of a business carried on by the affiliate principally with arm's length persons in the foreign country under whose laws the affiliate was incorporated, exists and is governed, and in which the business is principally carried on. Such currency transactions of the affiliate are afforded the same tax treatment as that given to similar transactions conducted with foreign financial institutions.

Paragraph 95(2.1)(c) is amended to require that the foreign affiliate entered into the agreements

• in the course of carrying on, principally with persons with whom the affiliate deals at arm's length, a business (other than a life insurance business) principally carried on in the country (other than Canada) under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued, or

• in the course of a life insurance business carried on by the affiliate principally in a country other than Canada and principally with persons with whom the affiliate deals at arm's length if

Amended subsection 95(2.1) will, for example, accommodate currency transactions of certain regulated foreign affiliates, of regulated life insurance corporations resident in Canada, that carry on an arm's length foreign life insurance business principally in a country different from their country of incorporation or continuation if the business activities are regulated in the country in which the business is principally carried on and in the country under whose laws the affiliate was incorporated or last continued.

The amendment to paragraph 95(2.1)(c) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999. However, see the commentary to new subsection 95(2.2) for details of an election to apply the amendments to amendment to paragraph 95(2.1)(c) to taxation years, of all foreign affiliates of the taxpayer, that begin after 1994. Note also that the amendment to paragraph 95(2.1)(c) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

Rule for Subsection 95(2)

ITA
95(2.2)

Subsection 95(2.2) of the Act provides rules, in paragraphs 95(2.2)(a) and (b), for the purpose of subsection 95(2).

Paragraph 95(2.2)(a) provides that, in certain circumstances, a non-resident corporation that was not a "foreign affiliate of a taxpayer in respect of which the taxpayer had a qualifying interest throughout a taxation year" but was such a foreign affiliate at the beginning or end of that year is deemed to be such a foreign affiliate of the taxpayer throughout that year. Those circumstances are that a person has, in that year, acquired or disposed of shares of that non-resident corporation or any other corporation and, because of that disposition or acquisition, that non-resident corporation became or ceased to be a foreign affiliate of the taxpayer in respect of which the taxpayer had a qualifying interest.

Paragraph 95(2.2)(b) provides that, in certain circumstances, a non-resident corporation that was not related to a taxpayer and to a foreign affiliate of the taxpayer throughout a taxation year but was so related at the beginning or end of that year is deemed to be related throughout that year to the taxpayer and to the foreign affiliate. Those circumstances are that a person has, in that year, acquired or disposed of shares of that non-resident corporation or any other corporation and, because of that disposition or acquisition, that non-resident corporation became or ceased to be a non-resident corporation that was related to the foreign affiliate and the taxpayer.

Subsection 95(2.2) is amended in the following ways.

First, the "preamble" of subsection 95(2.2) is amended to ensure that that subsection does not apply for the purpose of paragraph 95(2)(f). This amendment is consequential to the introduction of new subsection 95(2.22). For additional detail, see the commentary to subsection 95(2.22).

Second, paragraph 95(2.2)(b) is amended so that the rule in that paragraph also applies if, because of the acquisition, that non-resident corporation would have become (if paragraph 251(5)(b) of the Act did not apply to rights contained in the agreement under which the person acquired the shares) a non-resident corporation that was related to the taxpayer or to the taxpayer and the foreign affiliate. The addition of the reference to paragraph 251(5)(b) permits paragraph 95(2.2)(b) to apply where the relevant commercial arrangements involve a right to acquire shares which is then exercised.

The amendments to paragraph 95(2.2)(b) and to the "preamble" of subsection 95(2.2) apply to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. However, if a taxpayer so elects in writing and files the election with the Minister of National Revenue on or before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day on which this set of amendments is assented to, the following apply to taxation years, of all foreign affiliates of the taxpayer, that begin after 1994:

• the amendments to the portion of paragraph 95(2)(f) after subparagraph (ii) and before subparagraph (iii),

• the amendments to paragraph 95(2.1)(c),

• the amendments to the "preamble" to subsection 95(2.2),

• the amendments to paragraph 95(2.2)(b), and

• new subsection 95(2.21).

This set of proposals provides that, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue can make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation year that is necessary to take such an election into account.

Note also that the amendment to the "preamble" of subsection 95(2.2) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

Exception re Subsection 95(2.2)

ITA
95(2.21)

New subsection 95(2.21) of the Act ensures that the application of the rules in subsection 95(2.2) will not result in the provisions of paragraph 95(2)(a) recharacterizing, as an income or a loss from an active business, any income or loss from property of a particular foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest or is related throughout the taxation year of that particular affiliate, that relates to a transaction or event

• that occurred before that particular affiliate became, as determined without reference to subsection 95(2.2), a foreign affiliate of the taxpayer in respect of which the taxpayer had a qualifying interest or to which the taxpayer is related; or

• that occurred before a non-resident corporation (other than that particular affiliate), or a foreign affiliate of the taxpayer (other than that particular affiliate), referred to in paragraph 95(2)(a) became, as determined without reference to subsection 95(2.2),

New subsection 95(2.21) applies to taxation years, of a foreign affiliate of a taxpayer, that end after 1999. However, see the commentary to new subsection 95(2.2) for details of an election to apply new subsection 95(2.21) to taxation years, of all foreign affiliates of the taxpayer, that begin after 1994. Note also that new subsection 95(2.21) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

Rule for Paragraph 95(2)(a.1)

ITA
95(2.3)(b)

Subsection 95(2.3) of the Act exempts a foreign affiliate from the application of paragraph 95(2)(a.1) with respect to the sale or exchange of property that is currency when the conditions in that subsection are met.

One condition, found in paragraph 95(2.3)(b), is that the sale or exchange of property that is currency is made in course of a business carried on by the affiliate principally with arm's length persons in the country in which the affiliate is formed or organized and exists and is governed and in the country in which the business is principally carried on.

Paragraph 95(2.3)(b) is modified to require the sale or exchange to be made by the foreign affiliate in the course of a business conducted principally with arm's length persons. As well, the following conditions must be met:

• the business must be principally carried on in the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued, or

• if the affiliate is a foreign bank, a trust company, a credit union, an insurance corporation, or a trader or dealer in securities or commodities and the activities of the business are regulated

Amended paragraph 95(2.3)(b) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999.

Exception re Paragraph 95(2)(a.3)

ITA
95(2.4)

In general terms, paragraph 95(2)(a.3) of the Act deems income of a foreign affiliate of a taxpayer from Canadian source indebtedness, or from Canadian source lease obligations, to be income from a business other than an active business. Therefore, this income will be included in computing the affiliate's foreign accrual property income (FAPI).

Subsection 95(2.4) provides that paragraph 95(2)(a.3) will not apply in respect of income derived by a foreign affiliate of a taxpayer directly or indirectly from indebtedness to the extent that

• the income was derived by the affiliate in the course of a business that was conducted principally with persons with whom the affiliate deals at arm's length, and that was carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated in the jurisdiction in which it was formed or continued and exists and is governed, and in which the business was principally carried (paragraph 95(2.4)(a)), and

• the income was derived from the trading or dealing in such indebtedness with arm's length persons resident in a country other than Canada in which the affiliate and its similarly regulated competitors compete and have a substantial market presence (paragraph 95(2.4)(b)).

Paragraph 95(2.4)(a) is amended to refer to income derived by the affiliate in the course of a business that was conducted principally with persons with whom the affiliate deals at arm's length, and that was carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation, or a trader or dealer in securities or commodities, the activities of which are regulated under the laws

• of the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued and of each country in which the business is carried on through a permanent establishment (as defined by proposed new Regulation 8202) in that country,

• of the country in which the business is principally carried on, or

• if the affiliate is related to a corporation, of the country under the laws of which that related corporation is governed and any of exists, was (unless that related corporation was continued in any jurisdiction) formed or organized, or was last continued, if those regulating laws are recognized under the laws of the country in which the business is principally carried on and all of those countries are members of the European Union.

Amended paragraph 95(2.4)(a) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after1999.

Exception re Paragraph 95(2)(a.3)

ITA
95(2.41)

In general terms, paragraph 95(2)(a.3) of the Act deems income of a foreign affiliate of a taxpayer from Canadian source indebtedness, or from Canadian source lease obligations, to be income from a business other than an active business. This income will therefore be included in computing the affiliate's FAPI. In general terms, new subsection 95(2.41) of the Act provides that paragraph 95(2)(a.3) will not apply to income of a foreign affiliate of a taxpayer from Canadian source indebtedness held by that affiliate where that indebtedness is used or held

• to fund a liability or reserve of the foreign life insurance business of the affiliate, or

• as capital that can reasonably be considered to have been required for that life insurance business.

More specifically, new subsection 95(2.41) provides that, where four conditions are met, paragraph 95(2)(a.3) does not apply to a foreign affiliate of a taxpayer resident in Canada in respect of the affiliate's income for a taxation year derived, directly or indirectly, from indebtedness of persons resident in Canada or from indebtedness in respect of businesses carried on in Canada (referred to as the "Canadian indebtedness").

The first condition, set out in paragraph 95(2.41)(a), is that the taxpayer be at the end of the affiliate's taxation year

• a life insurance corporation resident in Canada, the business activities of which are subject by law to the supervision of the Superintendent of Financial Institutions or a similar authority of a province, or

• a corporation resident in Canada that is a subsidiary controlled corporation of such a life insurance corporation.

The second condition, set out in paragraph 95(2.41)(b), is that the Canadian indebtedness be used or held by the affiliate, throughout the period (in the taxation year) that it was used or held by the affiliate, in the course of carrying on a business (referred to as the "foreign life insurance business") that is a life insurance business carried on outside Canada (other than a business deemed by paragraph 95(2)(a.2) to be a "separate business other than an active business"), the activities of which are regulated

• in the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued, and

• in the country, if any, in which the business is principally carried on.

The third condition, set out in paragraph 95(2.41)(c), is that more than 90% of the gross premium revenue of the affiliate for the taxation year in respect of the foreign life insurance business be derived from the insurance or reinsurance of risks (net of reinsurance ceded) in respect of persons

• that were non-resident at the time that the policies in respect of those risks were issued or effected, and

• that were at that time dealing at arm's length with the affiliate, the taxpayer and all persons that were related at that time to the affiliate or the taxpayer.

The fourth condition, set out in paragraph 95(2.41)(d), is that it be reasonable to conclude that the affiliate used or held the Canadian indebtedness

• to fund a liability or reserve of the foreign life insurance business, or

• as capital that can reasonably be considered to have been required for the foreign life insurance business.

In general terms, new subsection 95(2.41) ensures that a life insurer can hold Canadian source indebtedness in its foreign life insurance business without causing the income from that indebtedness to be treated as FAPI of the foreign affiliate.

New subsection 95(2.41) applies to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999. New subsection 95(2.41) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

Definition "indebtedness"

ITA
95(2.5)

The definition "indebtedness" in subsection 95(2.5) of the Act provides an exception for a foreign affiliate of a certain Canadian taxpayers from the rules in subsection 95(2)(a.3) for indebtedness arising under agreements providing for the purchase, sale or exchange of currency if the conditions set out that definition are met.

One condition, found in paragraph (c) of the definition, is that agreements providing for the purchase, sale or exchange of currency must be entered into in the course of a business carried on by the foreign affiliate principally with arm's length persons in the country under whose laws the affiliate is formed or organized and exists and is governed and in the country in which the business is principally carried on.

Paragraph (c) is modified to require that the agreements providing for the purchase, sale or exchange of currency must be entered into in the course of a business conducted principally with arm's length persons. As well, the following conditions must be met:

• the business must be carried on principally in the country under whose laws the foreign affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued; or

• the foreign affiliate must be a foreign affiliate of a person described in paragraph 95(2.3)(a), and that person must be a foreign bank, a trust company, a credit union, an insurance corporation, or a trader or dealer in securities or commodities, and the activities of the business must be regulated

The amendments apply to taxation years, of a foreign affiliate of a taxpayer, that begin after 1999.

Definition "services"

ITA
95(3)(c) and (d)

Paragraph 95(2)(b) of the Act provides that service income of a controlled foreign affiliate of a taxpayer will, under certain circumstances, be treated as income from a business other than an active business.

Subsection 95(3) provides that, for the purpose of paragraph 95(2)(b), "services" includes the insurance of Canadian risks but does not include

• the transportation of persons or goods (paragraph 95(3)(a)), or

• services performed in connection with the purchase or sale of goods (paragraph 95(3)(b)).

New paragraph 95(3)(c) ensures that, for the purpose of paragraph 95(2)(b), the transmission of electronic signals or electricity along a transmission system located outside Canada does not constitute "services".

New paragraph 95(3)(d) accommodates certain types of contract manufacturing services provided by a foreign affiliate of a taxpayer. That paragraph ensures that, for the purpose of paragraph 95(2)(b), manufacturing or processing does not constitute "services" where it consists of manufacturing or processing outside Canada, in accordance with the taxpayer's specifications and under a contract between the taxpayer and the affiliate, of tangible property that is owned by the taxpayer if the property resulting from the manufacturing or processing is used or held by the taxpayer in the ordinary course of the taxpayer's business carried on in Canada.

New paragraphs 95(3)(c) and (d) apply to the 2001 and subsequent taxation years of a foreign affiliate of a taxpayer. However, if the taxpayer elects in writing and files the election with the Minister of National Revenue on or before the taxpayer's filing-due date for the taxpayer's taxation year that includes the day on which these amendments are assented to, new paragraphs 95(3)(c) and (d) apply to the taxation years, of all foreign affiliates of the taxpayer, that begin after 1994. Note, also, that new paragraph 95(3)(d) is included in the Global Section 95 Election package described at the beginning of the commentary to section 95.

"designated property" - Subparagraph 95(2)(a.1)(i)

ITA
95(3.1)

New subsection 95(3.1) of the Act provides, for the purpose of amended subparagraph 95(2)(a.1)(i) of the Act, a definition of the expression "designated property". For more detail about that definition, see the commentary to subparagraph 95(2)(a.1)(i).

New subsection 95(3.1) applies after to taxation years, of a foreign affiliate of a taxpayer, that begin after December 20, 2002. However, a taxpayer may elect to apply this amendment to taxation years that begin after 1994. For details about the election, refer to the commentary to subparagraph 95(2)(a.1)(i).

Definitions

ITA
95(3.2)

New subsection 95(3.2) of the Act provides definitions for the purposes of new subsections 95(3.2), (3.3) to (3.6) and new paragraphs 95(2)(c.1) to (c.6), (e.2) to (e.5), and (f.3) to (f.9).

See the commentary for those proposed new subsections and paragraphs for further detail.

Note also that the expression "exempt trust", as defined in subsection 95(3.2), is also used in new paragraphs 95(2)(w) and (x) by reference. For detail, see the commentary to those paragraphs.

"dividend-like redemption"

"Dividend-like redemption" of a share of a foreign affiliate (referred to here as the "issuing foreign affiliate") of a corporation resident in Canada is a redemption, an acquisition or a cancellation (referred to here as the "redemption") of the share if

• the share is excluded property (or would be excluded property if the holder of the share were a foreign affiliate of the corporation resident in Canada) of another foreign affiliate, of the corporation resident in Canada, that, immediately before the redemption, held the share, and

• the surplus entitlement percentage of the corporation resident in Canada, in respect of the issuing foreign affiliate, immediately before the redemption, is equal to the surplus entitlement percentage of the corporation resident in Canada, in respect of the issuing foreign affiliate, immediately after the redemption.

"eligible trust"

"Eligible trust", at any time, is a trust other than

• a trust created or maintained for charitable purposes,

• a trust governed by an employee benefit plan,

• a trust described in paragraph (a.1) of the definition "trust" in subsection 108(1),

• a trust governed by a salary deferral arrangement,

• a trust established for the purpose of administering a superannuation, pension, retirement, or employee benefits plan, or

• a trust that, at or before the time, was a personal trust.

"exempt trust"

"Exempt trust", at a particular time, in respect of a taxpayer resident in Canada, is a trust that, at that time, is a trust under which the interest of each beneficiary (in this definition determined without reference to subsection 248(25)) under the trust is, at all times that the interest exists during the trust's taxation year that includes the particular time, a specified fixed interest of the beneficiary in the trust, if at the particular time

• the trust is an eligible trust,

• there are at least 150 beneficiaries each of whom holds a specified fixed interest in the trust with a fair market value of at least $500, and

• the total of all amounts each of which is the fair market value of an interest as a beneficiary under the trust held by a specified purchaser in respect of the taxpayer resident in Canada is not more than 10% of the total fair market value of all interests as a beneficiary under the trust.

"participating interest"

"Participating interest" in a corporation, trust or partnership, as the case may be, (referred to here as the "entity") is a property that is

• where the entity is a corporation, a share of the capital stock of that corporation,

• where the entity is a trust, an interest as a beneficiary under that trust,

• where the entity is a partnership, an interest in that partnership, and

• under a contract, in equity or otherwise, either immediately or in the future, and absolutely or contingently, convertible into, exchangeable for or a right to acquire, directly or indirectly, a property described in paragraphs (a) to (c) of this definition, or a property the fair market value of which is determined principally by reference to those properties.

The expression "entity" is defined in new amended subsection 95(1). See the commentary to subsection 95(1) for more detail.

"specified fixed interest"

"Specified fixed interest", at a particular time, in a trust is a capital interest in the trust if

• the interest includes, at the particular time, a right of the interest holder as a beneficiary under the trust to receive, at or after the particular time and directly from the trust, income or capital of the trust,

• the interest was acquired, at or before the particular time, from the trust by any interest holder for consideration equal to its fair market value at the time of that acquisition, and

• no right as a beneficiary under the trust to any income or capital of the trust may cease to be a right of the interest holder otherwise than because of a disposition of the interest for consideration equal to the fair market value of the interest at the time of disposition or because of the disposition of the interest as a gift.

"specified purchaser"

"Specified purchaser", at any time, in respect of a particular corporation resident in Canada is a person or partnership that is, at that time,

• the particular corporation,

• a taxpayer resident in Canada with which the particular corporation does not deal at arm's length,

• a foreign affiliate of a person described above,

• a non-resident taxpayer with which a person described above does not deal at arm's length,

• a trust (other than an exempt trust) in which any person or partnership described above or below has a beneficial interest, or

• a partnership in which a person or partnership described above has, directly or indirectly, in any manner whatever, a partnership interest.

"specified vendor"

"Specified vendor", at any time, in respect of a particular corporation resident in Canada, is a person or partnership that is, at that time,

• a foreign affiliate of the particular corporation,

• a foreign affiliate of a partnership of which the particular corporation is a member,

• a partnership a member of which is a person described above, or

• a partnership in which any person or partnership described above has, directly or indirectly, in any manner whatever, a partnership interest.

Subsection 95(3.2) applies after December 20, 2002.

Definitions for paragraphs 95(2)(c.1) to (c.6)

ITA
95(3.3)

New subsection 95(3.3) of the Act provides definitions for the purposes of subsection 95(3.3) and paragraphs (2)(c.1) to (c.6). See the commentary for those proposed new paragraphs for further detail.

"contributed property"

"Contributed property" is a property

• that was held by the disposed foreign affiliate at the original disposition time, and was held by a person or partnership that was not a specified purchaser in respect of the particular corporation resident in Canada immediately after a transaction or event, or series of transactions or events that includes,

• for which it is reasonable to conclude that one of the main reasons for holding the property at the original disposition time was

"specified discontinuance"

"Specified discontinuance" of a current holder in respect of a particular corporation resident in Canada is

• a dissolution, winding-up, or a cessation of the existence, of a corporation or partnership if, immediately after a transaction or event, or series of transactions or events that includes the dissolution, winding-up or cessation, a person or partnership that is a specified purchaser in respect of the particular corporation resident in Canada,

• a merger or combination of corporations or partnerships if, immediately after a transaction or event that is, or series of transactions or events that includes, the merger or combination, a person or partnership that is a specified purchaser in respect of the particular corporation resident in Canada,

• a disposition of a participating interest in the current holder if, in the course of a transaction or event that is, or series of transactions or events that includes, the disposition of the participating interest, the specified share (or any portion of the specified share) or a right to or an interest in the specified share (or any portion of the interest in the specified share) becomes property of a person or partnership that is a specified purchaser in respect of the particular corporation resident in Canada.

Note that the expression "contributed property" is defined in new subsection 95(3.3).

"triggering disposition"

"Triggering disposition" of a specified share in respect of a particular corporation resident in Canada is the first disposition, after the original disposition time, of the specified share to a person or partnership that is, immediately after that first disposition, not a specified purchaser in respect of the particular corporation resident in Canada, but does not include

• a disposition of the specified share in respect of the particular corporation resident in Canada that arises in the course of

• a disposition of the specified share in respect of the particular corporation resident in Canada that is part of a series of transactions or events that includes

• a particular disposition of the specified share in respect of the particular corporation resident in Canada if, immediately after a transaction or event that is, or series of transactions or events that includes, the particular disposition,

Subsection 95(3.3) applies after December 20, 2002.

Definitions for paragraphs 95(2)(f.3) to (f.9)

ITA
95(3.4)

New subsection 95(3.4) of the Act provides definitions for the purposes of proposed new paragraphs 95(2)(f.3) to (f.9). See the commentary for those proposed new paragraphs for further detail.

"specified discontinuance"

"Specified discontinuance" of a current holder described in paragraph 95(2)(f.5) is

- a dissolution, winding-up, or cessation of the existence, of a corporation or partnership if, immediately after a transaction or event that is, or series of transactions or events that includes, the dissolution, winding-up or cessation, a specified purchaser, in respect of the particular corporation, holds the specified property,

- a merger or combination of corporations or partnerships if, immediately after a transaction or event that is, or series of transactions or events that includes, the merger or combination, a specified purchaser, in respect of the particular corporation, holds the specified property, or

- a disposition of a participating interest in the current holder if, in the course of a transaction or event that is, or series of transactions or events that includes, the disposition of the participating interest, the specified property (or any portion of the specified property) or a right to or an interest in the specified property (or any portion of the specified property) becomes property of a specified purchaser in respect of the particular corporation.

"triggering disposition"

"Triggering disposition", of a specified property in respect of a particular corporation resident in Canada, is the first disposition, after the original disposition time, of the specified property to a person or partnership that is, immediately after that first disposition, not a specified purchaser in respect of the particular corporation, but does not include

• a disposition of the specified property in respect of the particular corporation resident in Canada that arises in the course of

• a disposition of the specified property in respect of the particular corporation resident in Canada that is part of a series of transactions or events that includes

• the specified property (or any portion of the specified property) or a right to or an interest in the specified property (or any portion of the right to or interest in the specified property) (which right, interest or portion is referred to for the purposes of paragraphs 95(2)(f.7) and (f.9) as a "designated replacement property"),

• a property or a right to acquire a property (which property or right is referred to here and for the purposes of paragraphs 95(2)(f.7) and (f.9) as a "designated replacement property") that is substantially similar to the specified property or to the designated replacement property, or

• a property (referred to for the purposes of paragraphs 95(2)(f.7) and (f.9) as a "designated replacement property") the fair market value of which is determined primarily by reference to property that is the specified property or properties from which the specified property primarily derived its fair market value at the original disposition time.

Subsection 95(3.4) applies after December 20, 2002.

Definitions for paragraphs 95(2)(h) to (h.5)

ITA
95(3.5)

New subsection 95(3.5) of the Act provides definitions for the purposes of paragraphs 95(2)(h) to (h.5). See the commentary for those proposed new paragraphs for further detail.

"specified discontinuance"

"Specified discontinuance", of a current holder described in paragraph 95(2)(h.2), is

"specified purchaser"

"Specified purchaser", at any time, in respect of a particular taxpayer resident in Canada, is a person or partnership that is, at that time,

• the particular taxpayer,

• a taxpayer resident in Canada with which the particular taxpayer does not deal at arm's length,

• a foreign affiliate of a person described above,

• a non-resident taxpayer with which a person described above does not deal at arm's length,

• a trust (other than an exempt trust) in which a person or partnership described above or below is beneficially interested, or

• a partnership in which a person or partnership described above has, directly or indirectly in any manner whatever, a partnership interest.

"specified vendor"

"Specified vendor", at any time, in respect of a particular taxpayer resident in Canada, is a person or partnership that is, at that time,

"triggering disposition"

"Triggering disposition", of a specified property in respect of a particular taxpayer resident in Canada, is the first disposition, after the original disposition time, of the specified property, to a person or partnership that is, immediately after that first disposition, not a specified purchaser in respect of the particular taxpayer, but does not include

Subsection 95(3.5) applies after December 20, 2002.

Partnerships and trusts

ITA
95(3.6)

New subsection 95(3.6) of the Act provides rules to be used in determining if a non-resident corporation is a foreign affiliate of a particular corporation resident in Canada or of a particular taxpayer resident in Canada for the purposes of paragraphs 95(2)(c.1) to (c.5), (e.3) to (e.5), (f.3) to (f.9) and (h) to (h.5) and subsections 95(3.2) to (3.5) where a person or partnership is a member of a partnership or a beneficiary under a trust.

New subsection 95(3.6) provides that in determining if a non-resident corporation is a foreign affiliate of a particular corporation resident in Canada or of a particular taxpayer resident in Canada, as the case may be, in circumstances where, at any time, a person or partnership (which person or partnership is referred to here as the "holder") is a member of a partnership, or has a beneficial interest in a trust (other than an exempt trust),

• the partnership or trust, as the case may be, is deemed to be a non-resident corporation having capital stock of a single class divided into 100 issued shares,

• the holder is deemed to own at that time that proportion of the issued shares of that class that the fair market value of the holder's partnership interest in the partnership or of the holder's beneficial interest in the trust, as the case may be, is of the fair market value at that time of all partnership interests in the partnership or of all beneficial interests in the trust, as the case may be, and

• the fair market value, at any time, of the holder's beneficial interest in a trust (other than a non-discretionary trust within the meaning assigned by subsection 17(15)) is deemed to be the fair market value, at that time, of all beneficial interests in the trust.

Subsection 95(3.6) applies after December 20, 2002.

Anti-avoidance - 150 beneficiaries

ITA
95(3.7)

New subsection 95(3.7) of the Act provides that if it can be reasonably considered that one of the main reasons that an entity holds, at any time, a capital interest in a trust is to cause the trust to satisfy the condition in paragraph (b) of the definition "exempt trust" in subsection 95(3.2), the trust is deemed not to have satisfied at that time that condition.

Subsection 95(3.7) applies after December 20, 2002.

Computing Exempt Surplus

ITA
95(3.8)

New subsection 95(3.8) of the Act is an anti-avoidance rule to prevent the premature recognition of exempt surplus (the non-taxable portion of a capital gain) on an internal sale of excluded property to which any of proposed new paragraphs 95(2)(d) and (e) and (e.3) to (e.5) applies. Although capital gains on internal sales of excluded property, to which those paragraphs apply, create foreign accrual property income, where the foreign affiliate is not a controlled foreign affiliate of the particular corporation resident in Canada the particular corporation resident in Canada is not subjected to Canadian tax on that foreign accrual property income. Therefore, the particular corporation resident in Canada can be advantaged on an internal disposition of excluded property by claiming a relevant cost base, or electing proceeds of disposition, greater than the adjusted cost base of the property disposed of, in particular where the foreign jurisdiction does not tax capital gains. Where the foreign jurisdiction does tax capital gains, the particular corporation resident in Canada may wish to recognize gains because of the foreign taxes paid and the desire to create taxable surplus to match the related taxes, which would be appropriate where the amount of tax reflects Canadian tax rates on capital gains.

New subsection 95(3.8) provides that no amount may be added to the exempt surplus of a foreign affiliate of a particular corporation resident in Canada in respect of the gain arising on the internal disposition of excluded property if it is reasonable to conclude that one of the main reasons for claiming a relevant cost base, or electing proceeds of disposition, greater than the adjusted cost base of the property disposed of on that internal disposition was the creation of exempt surplus in respect of the particular corporation resident in Canada or in respect of a corporation resident in Canada with which the particular corporation resident in Canada does not deal at arm's length.

The factors to consider in making this determination include the following:

• the amount of foreign income tax paid,

• the amount of distribution made, or dividend paid, to the particular corporation resident in Canada or to a corporation resident in Canada with which the particular corporation resident in Canada does not deal at arm's length, and

• the amount of any election under section 93 made in respect of a disposition of a share of a foreign affiliate of the particular corporation resident in Canada or of a share of a foreign affiliate of a corporation resident in Canada with which the particular corporation resident in Canada does not deal at arm's length.

Subsection 95(3.8) applies after December 20, 2002.

 

Clause 134

Interpretation

ITA
248

Section 248 of the Act defines a number of terms that apply for the purposes of the Act, and sets out various rules relating to the interpretation and application of various provisions of the Act.

Definitions

ITA
248(1)

"qualifying member"

The definition "qualifying member" is added to subsection 248(1) of the Act.

Under this definition a qualifying member, in respect of a partnership at any time, means a person that is at that time a qualifying member of the partnership for the purposes of subdivision i of Division B of Part I of the Act because of paragraph 95(2)(o) of the Act. For more detail, see the commentary to new paragraphs 95(2)(o) and (q).

This definition is also relevant for the purposes of the amendments to the definitions "exempt earnings" and "exempt loss" in subsection 5907(1) of the Regulations. For more detail, see the commentary to that subsection.

The addition of the definition "qualifying member" applies to taxation years that end after 1999.

- Table of Contents - Previous - Next -