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New Draft Legislation for Base Erosion Rules for Canadian Banks 

Canadian Tax Adviser


March 04, 2014


Raphael Barchichat
Montreal, International Tax


Dave Downie
Toronto, Canadian Corporate Tax


Finance released draft legislation on the taxation of Canadian banks with foreign affiliates (FA) on February 27, 2014. According to Finance, the new draft legislation includes revisions to the base erosion rules in the foreign accrual property income regime released for comment on November 27, 2012, to address comments received.

Finance notes the revisions are generally intended to alleviate the tax cost to Canadian banks of using the excess liquidity of their foreign affiliates in their Canadian operations. Finance also intends the amendments to ensure that certain securities transactions undertaken in the course of a bank's business that facilitate trades for arm's-length customers are not caught by the base erosion rules.


Finance also notes that it will proceed with implementing the legislation, which is 13 pages long and includes 20 pages of explanatory notes, at "an early opportunity." There is no further comment period provided.


Finance advises that these measures are generally effective for taxation years that begin after October 31, 2012, with the exception of the new rules addressing the interaction between the excess liquidity proposals and the upstream loan rules, which are to apply in respect of taxation years of foreign affiliates that begin after February 27, 2014.


Finance released draft legislation to revise the base erosion rules for Canadian-based banks included in the foreign accrual property income regime on November 27, 2012. These proposed amendments were originally announced in the 2012 federal budget.


Draft legislation issued February 27, 2014
According to Finance, the draft legislation includes modifications to the November 27, 2012 proposals that, among other things:


  • Introduce rules to address the interaction between the excess liquidity proposals and the existing upstream loan rules
  • Ensure that the relief under the securities trading proposals applies in respect of trades in Canadian indebtedness
  • Expand the securities trading proposals to cover all property traded on a recognized stock exchange
  • Update the "market maker" exception from the base erosion rules
  • Provide a more targeted anti-avoidance rule in the excess liquidity proposals
  • Extend the relief under the excess liquidity proposals to certain hedging agreements.


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Information is current to March 04, 2014. 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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