Published by the Tax Group
McCarthy Tétrault FRANÇAIS VOL.3,
Tax Update (Volume 3, Issue 3)

Foreign Affiliate Proposals — Some Welcome and Unwelcome Changes

On August 19, 2011, the Department of Finance released extensive proposed amendments to the foreign affiliate rules which, in some cases, replace a number of the more controversial amendments that were contained in the proposed amendments released on February 27, 2004 (2004 Proposals) and that may be viewed as a significant shift in tax policy. Canadian taxpayers who relied on earlier proposals in their tax planning will need to consider whether the 2011 Proposals give rise to adverse or beneficial treatment.


Foreign Entity Characterization, Treaty Interpretation and Income Attribution
A recent Tax Court of Canada decision makes a number of determinations that are very significant in both a Canadian domestic and international tax context. These determinations touch upon the ability of parties to rectify retroactively a deficient contract, whether certain income attribution rules are triggered on a fair market value sale to a trust, the approach to foreign entity characterization, and the application of a tax treaty to prevent Canada from taxing a Canadian gain attributed to a resident of Canada pursuant to the Income Tax Act (Canada).

New Developments in Canadian Withholding Tax Obligations — New Forms Signal the End of the "Address Rule"
Earlier this year, the Canada Revenue Agency (CRA) issued new forms that can be used by persons paying amounts to non-residents that are subject to Canadian withholding taxes. Use of the forms is not mandatory and, if the only development were the release of the forms, there would be little to remark upon. However, the CRA also announced the end of the "address rule" used by Canadian payers in determining their withholding obligations effective December 31, 2011 and new diligence requirements. This note considers Canada’s existing withholding regime, the proposed changes and the difficulties that Canadian payers will face in complying with these rules.