The federal government announced a revised set of proposals in this year’s federal budget to govern the treatment of foreign investment entities and non-resident trusts. The government is releasing the new rules for public consultation with a view to developing legislation, which will in turn be released for comment.

The new set of proposed FIE/NRT rules, like the existing proposals, were developed to try to stop taxpayers from using aggressive off-shore tax-planning schemes to circumvent rules in the Income Tax Act preventing the use of foreign intermediaries to avoid tax. The government had said in the 2009 budget that it would be reviewing the outstanding proposals.

The existing FIE/NRT rules have been around in proposal form for nearly a decade, and have tended to be a major source of frustration to tax planners, partly because of the complexity of the rules, and partly because they seemed to catch in their net what would otherwise be considered legitimate business transactions. In announcing the new rules, the government, in the budget, said it intended to simplify the rules and better target aggressive offshore tax planning schemes it originally wanted to go after.

“It appears that the government has listened to the concerns of many stakeholders who had problems with the proposed rules as they had been drafted,” said Jamie Golombek, the Toronto-based managing director of tax and estate planning at CIBC Private Wealth Management. “It remains to be seen, however, as we analyze the new proposals, whether they will fully address stakeholders’ concerns.”

In addressing FIEs, the government makes proposals to address the issue of income inclusion with respect to interests held in an offshore investment fund property; the reporting of income by certain beneficiaries of a non-resident trust; and the reassessment period in respect of offshore investment fund property and trusts.

In addressing NRTs, the government proposes to provide an exemption from resident-contributor and resident-beneficiary status to such entities as pension funds, Crown corporations and registered charities; that the proposed rule imposing deemed Canadian resident status on a trust, by reason only of the trust acquiring or holding restricted property, be eliminated; and to introduce a new rule to ensure that loans made by a Canadian financial institution to a NRT not result in that institution being considered a resident contributor to the trust.

The proposed new rules also address the taxation of a deemed resident trust and the attribution rules governing NRTs.

The government proposes that the new measures regarding FIEs apply for taxation years that end after March 4, 2010, and that the rules governing NRTs apply for the 2007 tax year and beyond.

The government is asking for comments by May 4, 2010. A panel of tax practitioners will be formed to work with the Department of Finance in reviewing any issues raised during the comment period and to make recommendations on the design of draft legislation.

IE