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Canada

8 February 2008

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Proposed technical amendments to clarify tax rules applicable to specified investment flow-through entities

The Minister of Finance announced on 20 December 2007 proposed technical amendments to further clarify the tax rules that apply to specified investment flow-through entities (SIFTs). The SIFT rules, enacted in June 2007, were part of the government's 31 October 2006 Tax Fairness Plan .

Among the proposed amendments is the removal of the distinction between Canadian and foreign real and immovable properties in determining whether a trust is a real estate investment trust (REIT). Other SIFT taxation rules will be clarified through a number of technical amendments which in general terms will:

-   make it easier for SIFTs, REITs and taxable Canadian corporations to own trust and partnership interests without causing those trusts and partnerships to be SIFTs;
-   allow debt issued by a trust or partnership to be publicly-traded without causing the issuer to be a SIFT;
-   allow a trust or partnership to hold a diversified portfolio of investments through one or more "portfolio investment entities" without causing the trust or partnership to be a SIFT;
-   treat the equity securities of taxable entities that hold Canadian real, movable or resource properties the same way as other equities;
-   allow rent revenue of a subsidiary trust of a REIT to be qualified REIT revenue;
-   clarify the acceptable short-term investments of a REIT; and
-   allow more flexibility in the use of REIT subsidiaries to hold properties

The proposed amendments will, as is the case with the existing rules, apply to taxation years that end after 2006 (with a delayed application, generally to 2011, for trusts and partnerships that existed on 31 October 2006).

The Minister also indicated that the government remains committed to working with affected taxpayers to ensure that existing SIFTs can convert to taxable Canadian corporations without any undue tax consequences to investors, or the SIFTs themselves, on the conversion. It is intended that the income tax legislation needed to give effect to the amendments, and those that may be required for conversions, will be brought forward at the earliest opportunity in 2008.

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