The Department of Finance has once again introduced legislative proposals to reform the taxation of income of non-resident trusts and foreign investment entities.

Minister of Finance Ralph Goodale released a revised set of proposals today to provide guidance to taxpayers in anticipation of the amendments being tabled in Parliament in the fall. The government says that the proposed measures are designed to ensure that Canada taxes income earned by Canadians through foreign intermediaries in the same manner that that income would have been taxed if it had been earned directly.

The proposals were first announced in the 1999 budget. Draft legislation was released for comment in 2000, 2001 and 2002, followed by the tabling of a detailed Notice of Ways and Means Motion in Parliament in October 2003.

The revised legislative proposals released today are based on the motion tabled in 2003, but reflecting comments received by the Department of Finance since that time. Generally, the proposals would take effect for taxation years that begin after 2002.

Finance reports that some of the more significant changes include:

  • limiting the circumstances in which the Income Tax Act will apply to non-resident beneficiaries of trusts that are deemed resident in Canada;
  • clarifying the circumstances in which interests in commercial foreign investment trusts, that are exempted from the deemed residency provision of the non-resident trust rules because of the “exempt foreign trust” rule, will be subject to the rules for foreign investment entities; and
  • clarifying the rules that provide relief from double taxation in respect of income earned by Canadians through foreign intermediaries such as foreign investment entities.

The proposals also include amendments to the rules governing Crown charge reimbursements. These amendments, which were previously released for comment on Dec. 21, 2004, have been modified in response to commentary received on the draft.

Today’s release also includes a number of technical amendments to the Income Tax Act. These amendments were last released as part of a package of legislative proposals released on Feb. 27, 2004. Part two of that package, dealing with foreign affiliates, will be included in a separate legislative package to be finalized for tabling at a later date.

http://www.fin.gc.ca/news05/05-049e.html