(June 22 – 12: 15 ET) – Finance Minister Paul Martin has released draft legislation dealing with the taxation of offshore investments.
Today Martin published new draft rules for the taxation of non-resident trusts and foreign investment entities. The Department of Finance is seeking comments on the draft legislation by Sept. 1.
These proposals were introduced in the 1999 federal budget and revised last November. The proposed non-resident trust rules generally provide that a family trust will be considered to be resident in Canada, and therefore taxable, where certain non-arm’s length contributions are made to the trust by a person who is resident in Canada at the end of the year.
A foreign investment entity will generally be a non-resident entity that has investment properties representing at least one-half of its assets. Canadian investors may include their annual share of the income earned by the entity in their taxable income. However, a Canadian investor who does not have sufficient information to do the calculation would instead be required to include in income the annual increase in the fair market value of the interest in the entity.
The draft legislation also includes special measures designed to prevent avoidance of these rules, in particular through the use of foreign insurance policies and the use of interests in non-resident entities that are designed to track returns earned on investment properties.
“It is important that the income tax system not provide a means for Canadians to avoid Canadian income tax by transferring funds to offshore trusts or accounts. The proposed rules intend to provide a fair and workable approach to dealing with this complex area,” the Minister said.