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Bill C-70

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PART II

AMENDMENTS RELATING TO FOREIGN AFFILIATES

45. (1) The portion of subsection 20(3) of the Act after paragraph (b) is replaced by the following:

subject to subsection 20.1(6), the borrowed money shall, for the purposes of paragraphs (1)(c), (e) and (e.1), subsections 20.1(1) and (2), section 21 and subparagraph 95(2)(a)(ii) and for the purpose of paragraph 20(1)(k) of the Income Tax Act, Chapter 148 of the Revised Statutes of Canada, 1952, be deemed to have been used for the purpose for which the money previously borrowed was used or was deemed by this subsection to have been used, or to acquire the property in respect of which the amount was payable, as the case may be.

(2) Subsection (1) applies to expenses incurred in taxation years that begin after 1994 except that, where there has been a change in the taxation year of a foreign affiliate of a taxpayer in 1994 and after February 22, 1994, subsection (1) applies to expenses incurred in taxation years of the foreign affiliate of the taxpayer that end after 1994, unless

    (a) such foreign affiliate had requested that change in the taxation year in writing before February 22, 1994 from the income taxation authority of the country in which it was resident and subject to income taxation; or

    (b) the first taxation year of such foreign affiliate that began after 1994 began at a time in 1995 that is earlier than the time that that taxation year would have begun if there had not been that change in the taxation year of such foreign affiliate.

46. (1) The definition ``foreign affiliate'' in subsection 95(1) of the Act is replaced by the following:

``foreign affiliate''
« societé étrangère affiliée »

``foreign affiliate'', at any time, of a taxpayer resident in Canada means a non-resident corporation in which, at that time,

      (a) the taxpayer's equity percentage is not less than 1%, and

      (b) the total of the equity percentages in the corporation of the taxpayer and of each person related to the taxpayer (where each such equity percentage is determined as if the determinations under paragraph (b) of the definition ``equity percentage'' in subsection (4) were made without reference to the equity percentage of any person in the taxpayer or in any person related to the taxpayer) is not less than 10%,

    except that a corporation is not a foreign affiliate of a non-resident-owned investment corporation;

(2) The description of D in the definition ``foreign accrual property income'' in subsection 95(1) of the Act is replaced by the following:

    D is the total of the affiliate's losses for the year from property and businesses (other than active businesses) determined as if there were not included in the affiliate's income any amount described in any of paragraphs (a) to (d) of the description of A and as if each amount described in clause (2)(a)(ii)(D) that was paid or payable, directly or indirectly, by the affiliate to another foreign affiliate of either the taxpayer or a person with whom the taxpayer does not deal at arm's length were nil where an amount in respect of the income derived by the other foreign affiliate from that amount that was paid or payable to it by the affiliate was added in computing its income from an active business,

(3) Subsection 95(1) of the Act is amended by adding the following in alphabetical order:

``active business''
« entreprise exploitée activement »

``active business'' of a foreign affiliate of a taxpayer means any business carried on by the affiliate other than

      (a) an investment business carried on by the affiliate, or

      (b) a business that is deemed by subsection (2) to be a business other than an active business carried on by the affiliate;

``foreign bank''
« banque étrangère »

``foreign bank'' means an entity that would be a foreign bank within the meaning assigned by the definition of that expression in section 2 of the Bank Act if

      (a) that definition were read without reference to the portion thereof after paragraph (g) thereof, and

      (b) the entity had not been exempt under section 12 of that Act from being a foreign bank;

``income from an active business''
« revenu provenant d'une entreprise exploitée activement »

``income from an active business'' of a foreign affiliate of a taxpayer for a taxation year includes, for greater certainty, any income of the affiliate for the year that pertains to or is incident to that business but does not include

      (a) other income that is its income from property for the year, or

      (b) its income for the year from a business that is deemed by subsection (2) to be a business other than an active business carried on by the affiliate;

``income from property''
« revenu de biens »

``income from property'' of a foreign affiliate of a taxpayer for a taxation year includes its income for the year from an investment business and its income for the year from an adventure or concern in the nature of trade, but, for greater certainty, does not include its income for the year that is because of subsection (2) included in its income from an active business or in its income from a business other than an active business;

``investment business''
« entreprise de placement »

``investment business'' of a foreign affiliate of a taxpayer means a business carried on by the affiliate in a taxation year (other than a business deemed by subsection (2) to be a business other than an active business carried on by the affiliate) the principal purpose of which is to derive income from property (including interest, dividends, rents, royalties or any similar returns or substitutes therefor), income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the disposition of investment property, unless it is established by the taxpayer or the affiliate that, throughout the period in the year during which the business was carried on by the affiliate,

      (a) the business (other than any business conducted principally with persons with whom the affiliate does not deal at arm's length) is

        (i) a business carried on by it as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated in the country in which the business is principally carried on, or

        (ii) the development of real estate for sale, the lending of money, the leasing or licensing of property or the insurance or reinsurance of risks, and

      (b) the affiliate or, where the affiliate carries on the business as a member of a partnership (except where the affiliate is a specified member of the partnership in a fiscal period of the partnership that ends in the year), the partnership employs

        (i) more than 5 employees full time in the active conduct of the business, or

        (ii) the equivalent of more than 5 employees full time in the active conduct of the business taking into consideration only the services provided by its employees and the services provided outside Canada to the affiliate or the partnership by the employees of

          (A) a corporation related to the affiliate (otherwise than because of a right referred to in paragraph 251(5)(b)), or

          (B) members of the partnership (other than a member of the partnership that was a specified member of the partnership in a fiscal period of the partnership that ends in the year)

        where the corporation or members referred to in clause (A) or (B) receive compensation from the affiliate or the partnership for the services provided to the affiliate or the partnership by those employees the value of which is not less than the cost to such corporation or members of the compensation paid or accruing to the benefit of those employees that performed the services during the time the services were performed by those employees;

``investment property''
« bien de placement »

``investment property'' of a foreign affiliate of a taxpayer includes

      (a) a share of the capital stock of a corporation other than a share of another foreign affiliate of the taxpayer that is excluded property of the affiliate,

      (b) an interest in a partnership other than an interest in a partnership that is excluded property of the affiliate,

      (c) an interest in a trust other than an interest in a trust that is excluded property of the affiliate,

      (d) indebtedness or annuities,

      (e) commodities or commodities futures purchased or sold, directly or indirectly in any manner whatever, on a commodities or commodities futures exchange (except commodities manufactured, produced, grown, extracted or processed by the affiliate or a person to whom the affiliate is related (otherwise than because of a right referred to in paragraph 251(5)(b)) or commodities futures in respect of such commodities),

      (f) currency,

      (g) real estate,

      (h) Canadian and foreign resource properties,

      (i) interests in funds or entities other than corporations, partnerships and trusts, and

      (j) interests or options in respect of property that is included in any of paragraphs (a) to (i);

``lease obligation''
« obligation découlant d'un bail »

``lease obligation'' of a person includes an obligation under an agreement that authorizes the use of or the production or reproduction of property including information or any other thing;

``lending of money''
« prêt d'argent »

``lending of money'' by a person (for the purpose of this definition referred to as the ``lender'') includes

      (a) the acquisition by the lender of trade accounts receivable (other than trade accounts receivable owing by a person with whom the lender does not deal at arm's length) from another person or the acquisition by the lender of any interest in any such accounts receivable,

      (b) the acquisition by the lender of loans made by and lending assets (other than loans or lending assets owing by a person with whom the lender does not deal at arm's length) of another person or the acquisition by the lender of any interest in such a loan or lending asset,

      (c) the acquisition by the lender of a foreign resource property (other than a foreign resource property that is a rental or royalty payable by a person with whom the lender does not deal at arm's length) of another person, and

      (d) the sale by the lender of loans or lending assets (other than loans or lending assets owing by a person with whom the lender does not deal at arm's length) or the sale by the lender of any interest in such loans or lending assets;

``licensing of property''
« concession d'une licence sur un bien »

``licensing of property'' includes authorizing the use of or the production or reproduction of property including information or any other thing;

(4) Paragraph 95(2)(a) of the Act is replaced by the following:

    (a) in computing the income from an active business for a taxation year of a particular foreign affiliate of a taxpayer in respect of which the taxpayer has a qualifying interest throughout the year there shall be included any income of the affiliate for that year from sources in a country other than Canada that would otherwise be income from property of the affiliate for the year to the extent that

      (i) the income

        (A) is derived by the particular affiliate from activities that can reasonably be considered to be directly related to the active business activities carried on in a country other than Canada by

          (I) any other non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year, or

          (II) the taxpayer, where the taxpayer is a life insurance corporation resident in Canada throughout the year, and

        (B) would be included in computing the amount prescribed to be the earnings or loss from an active business carried on in a country other than Canada of

          (I) the non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year, or

          (II) the taxpayer, where the taxpayer is a life insurance corporation resident in Canada throughout the year

        if it were a foreign affiliate of the taxpayer and the income were earned by it,

      (ii) the income is derived from amounts that were paid or payable, directly or indirectly, to the particular affiliate or a partnership of which the particular affiliate was a member

        (A) by

          (I) a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year, or

          (II) a partnership of which a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year is a member and of which that non-resident corporation is not a specified member at any time in a fiscal period of the partnership that ends in the year

        to the extent that those amounts that were paid or payable are for expenditures that would, if the non-resident corporation or the partnership were a foreign affiliate of the taxpayer, be deductible by it in the year or a subsequent year in computing the amounts prescribed to be its earnings or loss from an active business, other than an active business carried on in Canada,

        (B) by

          (I) another foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest throughout the year, or

          (II) a partnership of which another foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest throughout the year is a member and of which that other affiliate is not a specified member at any time in a fiscal period of the partnership that ends in the year

        to the extent that those amounts that were paid or payable are for expenditures that were or would be, if the partnership were a foreign affiliate of the taxpayer, deductible in the year or a subsequent taxation year by the other affiliate or the partnership in computing the amounts prescribed to be its earnings or loss from an active business, other than an active business carried on in Canada,

        (C) by a partnership of which the particular affiliate is a member and of which the particular affiliate is not a specified member at any time in a fiscal period of the partnership that ends in the year to the extent that those amounts that were paid or payable were for expenditures that would be, if the partnership were a foreign affiliate of the taxpayer, deductible in the year or a subsequent year in computing the amounts prescribed to be its earnings or loss from an active business carried on by it outside Canada,

        (D) by another foreign affiliate of the taxpayer (in this clause referred to as the ``second affiliate'') to which the particular affiliate and the taxpayer are related throughout the year to the extent that the amounts are paid or payable by the second affiliate

          (I) under a legal obligation to pay interest on borrowed money used for the purpose of earning income from property, or

          (II) on an amount payable for property acquired for the purpose of gaining or producing income from property

        where

          (III) the property is excluded property of the second affiliate that is shares of a foreign affiliate (other than the particular affiliate) of the taxpayer in respect of which the taxpayer has a qualifying interest throughout the year (in this clause referred to as the ``third affiliate''),

          (IV) the second and third affiliates are resident in and subject to income taxation in the same country, and

          (V) the amounts paid or payable are relevant in computing the liability for income taxes in that country of the members of a group of corporations composed of the second affiliate and one or more other foreign affiliates of the taxpayer (the shares of which are excluded property) that are resident and subject to income taxation in that country and in respect of which the taxpayer has a qualifying interest throughout the year, or

        (E) by the taxpayer, where the taxpayer is a life insurance corporation resident in Canada (in this clause referred to as the ``insurer''), to the extent that those amounts that were paid or payable were for expenditures that are deductible in the year or a subsequent taxation year by the insurer in computing its income or loss from carrying on its life insurance business outside Canada and are not deductible in the year or a subsequent taxation year in computing its income or loss from carrying on its life insurance business in Canada,

      (iii) the income is derived by the particular affiliate from the factoring of trade accounts receivable acquired by the particular affiliate or a partnership of which the particular affiliate was a member from a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year to the extent that the accounts receivable arose in the course of an active business carried on in a country other than Canada by the non-resident corporation, or

      (iv) the income is derived by the particular affiliate from loans or lending assets acquired by the particular affiliate or a partnership of which the particular affiliate was a member from a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year to the extent that the loans or lending assets arose in the course of an active business carried on in a country other than Canada by the non-resident corporation;