2018 Federal Budget - International

| 2/28/2018

Surplus Stripping

Section 212.1 is a provision that is intended to prevent a non-resident (the transferor) from stripping surplus out of a Canadian resident corporation (Canco) as a capital gain which might be realized free of Canadian tax rather than as a dividend that would be subject to Canadian withholding tax. In the absence of section 212.1, this could be achieved by the transferor by selling the shares of a Canco with accumulated surplus to another, connected, non-arm’s-length Canco in return for, say, a promissory note or shares with high paid-up capital (PUC).

A transferor that receives non-share consideration would be deemed by subsection 212.1 to have received a dividend to the extent that the non-share consideration exceeds the PUC of the transferred shares. If the transferor receives high PUC shares, the PUC of the shares received would be ground down to the PUC of the transferred shares.

Section 212.1 is similar to section 84.1 which applies in a purely domestic context, although section 212.1 applies to any non-resident transferor whereas section 84.1 applies only to transferors who are individuals.

The Budget proposes to introduce an anti-avoidance measure, effective for transactions on or after Budget Day, to prevent section 212.1 from being circumvented by having a partnership or trust own the surplus-laden Canco shares. The transferor would avoid section 212.1 by selling the partnership or trust interest rather than the Canco shares.

Foreign Accrual Property Income

In broad terms, foreign accrual property income (FAPI) is passive income earned by a “foreign affiliate” of a Canadian resident. FAPI is taxed on the accrual basis to the Canadian shareholder of a “controlled foreign affiliate.” If earned by a non-controlled foreign affiliate, it is not taxed in Canada on the accrual basis, but is taxable when repatriated to Canada.

Foreign-source income that would otherwise be treated as passive would, in certain circumstances, be considered to be active where the entity earning the income employs more than five employees (or the equivalent thereof), full-time in the active conduct of the business.

Taxpayers whose foreign operations would not require more than five employees could pool their investments with other taxpayers in a similar position in an entity in which they would hold shares the return on which would be tracked to their own investments. The pooled entity would require more than five employees thus converting the income of all the investors to active business income.

The Budget proposes to introduce measures that would prevent the circumvention of the “more than five employee” rule in this fashion. Each of the tracked pools would be treated as a separate business that would not employ more than five employees.

The Budget also proposes to introduce measures that are intended to prevent the avoidance of controlled foreign affiliate status by the use of tracked pooling arrangements similar to those described above where the individual Canadian taxpayer does not participate in a controlling interest in the foreign affiliate. Under the tracking arrangement each taxpayer retains control over its contributed assets and any returns from those assets accrue to it benefit. This proposal would deem a foreign affiliate of a taxpayer in this type of scenario to be a controlled foreign affiliate.

Regulated foreign financial institutions earning what would otherwise be FAPI are considered to be earning active business income if, among other conditions, they meet certain minimum capital requirements. These minimum requirements have heretofore not applied to trading or dealing in indebtedness. The Budget proposes to introduce measures that will apply the same minimum capital requirements to trading or dealing in indebtedness.

All of these measures will apply to taxation years of foreign affiliates that begin on or after Budget Day.


The Budget proposes to extend the normal four-year reassessment period that is generally applicable to income arising from a taxpayer’s foreign affiliate by three years. The extended reassessment period will now coincide with that available to the CRA in connection with transactions between Canadian residents and non-arm’s-length non-residents.

This measure will apply to taxation years that begin on or after Budget Day.

Where a taxpayer has transactions with a non-arm’s length non-resident, because the normal reassessment period available to the CRA is extended three years, there are circumstances that can prevent the CRA from reassessing a now statute-barred earlier year to which a taxpayer has carried back a loss.

The Budget proposes to allow the CRA an additional three years to reduce a loss carried back to a prior taxation year to the extent that the reassessment involves the adjustment, in a later year, of the loss carry back.

This measure will apply where the loss is carried back from a taxation year that ends on or after Budget Day.

Reporting Requirements

The Budget proposes to shorten the filing deadline for the foreign affiliate information reporting (T1134) from the current 15 months after the Canadian company’s year-end to six months after the year-end to coincide with the filing deadline for the corporate tax return (T2).

This proposal applies to taxation years that begin after 2019.

Sharing Information for Criminal Matters

The Budget proposes to allow the legal tools available under the Mutual Legal Assistance in Criminal Matters Act to be used by CRA in order to facilitate the sharing of information related to tax offenses under Canada’s tax treaties, tax information exchange agreements and the Convention on Mutual Administration Assistance in Tax Matters. In addition, the Budget proposes to enable the sharing of tax information with Canadian mutual legal assistance partners in respect of acts that, if committed in Canada, would constitute terrorism, organized crime, money laundering, criminal proceeds or designated substance offenses. These proposals will also enable confidential information under Part IX of the Excise Tax Act and the Excise Act, 2001 to be disclosed to Canadian police officers in respect of those offenses where such disclosure is currently permitted under the ITA.