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1 February 2014

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Draft legislation concerning taxation of Canadian banks with foreign affiliates released

On 27 February 2014, the Department of Finance released draft legislative proposals relating to the Canadian Income Tax Act and Income Tax Regulations concerning the taxation of Canadian banks with foreign affiliates.
The proposals contain modifications to the draft legislation released for consultation on 27 November 2012 (announced in Budget 2012) in respect of the "base erosion" rules in the Income Tax Act's foreign accrual property income regime.

The modifications, 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; and
- extend relief under the excess liquidity proposals to certain hedging agreements.
These measures will generally be effective for taxation years that begin after 31 October 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 27 February 2014. References to "Announcement Date" in the draft legislation and explanatory notes refer to 27 February 2014.

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