The federal government has announced amendments to the Income Tax Act, to ensure that the spirit of its Tax Fairness Plan is followed. The Tax Fairness Plan was introduced in 2006 to stem the proliferation of income trusts, essentially treating their profits in the same way as corporate profits.
“These proposed measures will ensure that the policy objectives of the Tax Fairness Plan continue to be met,” said Jim Flaherty, Minister of Finance. “They also reflect our Government’s ongoing commitment to address structures that frustrate those policy objectives.”
That plan came into full force on January 1, 2011. The 2006 announcement sparked the creation of an entire new class of investment: the stapled security. These consist of two separate securities that are “stapled” together so the securities are not freely transferable independently of one another.
Typically, a stapled security consists of an equity component and a debt component, one of which is publicly-traded. The proposed amendments would provide that interest paid on the debt portion will not be deductible in computing the income of the payer for income tax purposes. This provision is notwithstanding the general rules applicable to interest deductibility.
The amendment would not affect stapled securities that involve only publicly-traded shares that pay dividends.
Stapled securities have also been employed by real estate investment trusts—which were exempted from the 2006 Tax Fairness Plan—to allow the REIT to carry on business or hold property which would otherwise cause it to lose its status as a REIT.
The stapled security is essentially a holding company for the non-qualifying business or property, and pays its revenues to the REIT or the REIT unitholder.
Under the amendment, any amount paid by the other entity to the REIT will not be deductible in computing the income of the payer for income tax purposes.
The proposed amendments are effective on any amount that is paid or becomes payable on or after today, “unless the amount is paid or becomes payable during, and is in respect of, the entity’s transition period.”
The Finance Department warned that further attempts to frustrate the spirit of the Tax Fairness Plan would be addressed swiftly.
“The Government 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,” Finance said in its announcement.
For more on today’s announcement, click here.