April 19, 2004
Foreign Affiliate Rules
The draft technical amendments released in December 2002 proposed significant changes to the foreign affiliate rules. Many of these proposals have been revised and included in the current draft technical amendments. There are also a number of entirely new proposals. The draft amendments propose changes to both the Income Tax Act and the Income Tax Regulations. The changes to the Act are set out in a separate section (Part 2) of the draft amendments. A separate attachment, Appendix C, contains the draft amendments to the Regulations relating to foreign affiliates.
These are detailed, lengthy proposals. They affect, for example, section 93 elections, the definition of "controlled foreign affiliate," and the rules for tax-deferred foreign affiliate reorganizations. In addition, proposed stop-gain and stop-loss rules would prevent the recognition of income (or losses) on the internal disposition of certain property by a foreign affiliate until there is an external disposition of the property.
Regarding transitional elections, the proposed amendments again provide, with some modifications, for a "Fresh Start Section 95 Election" and a "Global Section 95 Election." Both elections would allow a taxpayer to elect to have certain provisions of the proposed amendments apply for taxation years of all foreign affiliates of the taxpayer that begin after 1994. The amendments would also provide a mechanism for revoking such elections.
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