For the week of October 24, 2012
► Step one: set your goals, says David Christianson
► Economic update: Dispelling global uncertainty
► Evelyn Jacks: New relationship? Beware of tax consequences
► Poll Question: Should governments increase taxes on investment income dividends and capital gains to increase revenues and meet their responsibilities?
► DISTINGUISHED PRACTICES: Tips for Real Wealth Managers™: Broader interpretation of transfer pricing
► Did You Know? Legislation in both official languages
► Tax Tips: How the CRA is helping small business
► Featured Book: Master Your Money Management
► Featured Web Tools: Featured Program: EverGreen Explanatory Notes
Draft legislation affects SIFTs and REITs
August 1, 2012
On July 25, the Department of Finance released draft legislation that aims to curtail the use of "stapled” securities in Specified Investment Flow-Through entities (SIFTs) and real estate investment trusts (REITs), thereby increasing the fairness of Canada's tax system.
As Finance explains in its Explanatory Notes to the legislative proposal, "a stapled security involves two or more separate securities that are ‘stapled' together such that the securities are not freely transferable independently of each other.” Stapled securities allow SIFTs and REITs to take deductions that "frustrate” the policy objectives of Canada's Income Tax Act.
The federal proposal, which was deemed to have come into effect on July 20, 2012, introduces two new sections to the Act that operate in conjunction with one another: section 12.6 and section 18.3. The latter introduces a regime that denies deductions for amounts that are paid or payable in respect of certain types of stapled securities.
To avoid the application of section 18.3, an entity — such as a SIFT or REIT — must "un-staple” its affected securities. The effect of section 12.6 is to disregard any un-stapling that is not permanent and irrevocable, explains the notes.
When the federal government announced the Tax Fairness Plan in 2007, it indicated that, if structures or transactions that were clearly devised to frustrate policy objectives emerged, they would be subject to change. These amendments are meant to close some loopholes that clever tax planners have been using and, thus, the rules retain their tax fairness initiative.
The proposed amendments to the SIFT rules are technical in nature, but not extremely complicated. Sometimes a corporation or a SIFT (alone or with a subsidiary) would issue equity and debt instruments, at least one of which was publicly traded, that are stapled together. Notwithstanding the general rules applicable to the deductibility of interest, the proposed amendments provide that interest that is paid or payable on the debt portion of such a stapled security will not be deductible in computing the income of the payer for income tax purposes. Arrangements that involve shares issued by publicly traded corporations, the distributions of which are treated as dividends for tax purposes, are not intended to be affected by this recent amendment.
The amendments apply to the stapled securities of a trust, corporation or partnership, if one or more of the stapled securities is listed or traded on a stock exchange or other public market and any of the following applies:
- the stapled securities are both issued by the entity,
- one of the stapled securities is issued by the entity, and the other by a subsidiary of the entity, or
- one of the stapled securities is issued by a REIT or the subsidiary of a REIT.
Overall, the amendments have placed SIFTs in a similar tax situation as public corporations. Prior to these amendments SIFTs were largely treated the same way individual taxpayers were — having to pay tax instalments, for example. From now on, however, SIFTs will be required to estimate tax instalments and pay them on a monthly basis, just like corporations.
In the backgrounder information relating to this news release the government stated that it "will continue to monitor Canadian tax planning for structures and transactions that might frustrate the policy objectives of the Tax Fairness Plan and will, as necessary, take appropriate corrective action.”
Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.