Published by the Tax Group
McCarthy Tétrault FRANÇAIS VOL.5,
Tax Update (Volume 5, Issue 1)

Subsection 88(3): A Policy Shift?
On August 19, 2011, the Department of Finance (Canada) released extensive proposed amendments to the foreign affiliate rules, some of which were enacted on June 26, 2013, and which relate to a liquidation and dissolution of a foreign affiliate into a Canadian shareholder and into another foreign affiliate. This paper focuses on the former and highlights what appears to be a significant policy shift.

Pièces Automobiles Lecavalier: The Application of GAAR to Cross-Border Debt Forgiveness
Over the years, taxpayers have developed different techniques for mitigating the potential application of the debt forgiveness rules contained in section 80 of the Income Tax Act (Canada) (Act) in the context of the sale of shares of a corporation with underwater debt owed to its parent. One of these techniques involves the subscription by the parent for additional shares of the corporation and the use of the subscription proceeds to repay the debt owed to the parent by the corporation. On a few occasions, the Canada Revenue Agency has indicated that it would not apply paragraph 80(2)(g) of the Act in these circumstances, but that the general anti-avoidance rule (GAAR) would likely apply. In the recent case of Pièces Automobiles Lecavalier Inc. v. The Queen, the Tax Court of Canada (Court) had to consider this issue in a cross-border context. The decision is of particular interest for its analysis of the requirement under GAAR that the transaction giving rise to a tax benefit be an "avoidance transaction" within the meaning of subsection 245(3) of the Act.

Update: Prescribed Interest Rate Applicable to the Deemed Interest Income Provision

In previous articles discussing the Budget 2012 foreign affiliate "dumping" and shareholders loan rules (see, for example, Budget 2012 Legislation – More Revisions to Foreign Affiliate "Dumping" and Shareholders Loan Rules in our November 16, 2012 issue), we discussed the interest imputation rules for pertinent loan or indebtedness (PLOI) to non-residents. In particular, we noted the submissions made that the interest imputed under section 17.1 for a PLOI was too high. The Canada Revenue Agency website has been updated recently to include the prescribed interest rate applicable to the deemed interest income provision. The rate can be found on this page.