Canadian corporations seeking relief from the upstream loan and paid up capital (PUC) offset rules, as provided for in recently proposed measures, should file the applicable election by the end of the year even though the draft legislation introducing these measures is not yet tabled in a bill or enacted into law. These elections, which were proposed in the draft legislation released September 16, 2016, provide relief related to the upstream loan rules on corporate reorganizations and the PUC offset rules that are part of the foreign affiliate dumping regime. The draft legislation provides that the elections must be filed before January 1, 2017 and this deadline has not been extended by the CRA or Finance. As a result, even though it is unlikely the draft legislation will be enacted before the end of the year, elections should be filed by December 31, 2016.
There is no prescribed form for these elections. Taxpayers that wish to make an election should send a letter by registered mail to the CRA stating they are making the applicable election.
The new upstream loan measures generally provide relief against potential double income inclusions where creditor foreign affiliates, Canadian taxpayers, and Canadian and non-resident debtors are merged or liquidated. The rules apply to such transactions that take place on or after September 16, 2016, but the election, if filed before 2017, allows these proposed rules to apply back to August 20, 2011, the date that the upstream loan rules originally became effective.
Other provisions in the Act could provide relief from the potential double income inclusion that could have arisen as a result of some of the reorganization transactions that these proposals now apply to. However, while the changes are relieving, not all reorganization transactions are covered by these new rules.
The upstream loan election can be filed to bring certain reorganization transactions that took place between August 2011 and September 2016 into the ambit of these new measures, so as to alleviate the potential double income inclusion. This election can also be filed as a protective measure if there is some doubt as to the nature of past transactions that took place within the corporate group.
Foreign affiliate dumping and PUC offset
When first introduced, the foreign affiliate dumping rules provided for a deemed dividend notwithstanding that the Canadian corporation may have had significant PUC. The legislation was subsequently amended retroactively to provide for an automatic reduction to PUC, rather than a deemed dividend, in certain circumstances. The draft legislation permits taxpayers to elect to have the deemed dividend rule apply, rather than the PUC offset rule, for transactions that occurred between March 28, 2012 and August 16, 2013 provided certain conditions outlined in the draft legislation are met.
For more information, contact your KPMG adviser.
Information is current to December 13, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
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