Skip to main content

Minister of Finance Announces Proposed Changes to the Foreign Accrual Property Income Rules Applicable to Canadian Banks

Reading Time 2 minute read


Tax Bulletin

On November 27, 2012, the Minister of Finance (Canada) released draft legislative proposals relating to the income tax rules that apply to Canadian banks with foreign affiliates.[1]

The legislative proposals include amendments to the "base erosion" rule in paragraph 95(2)(a.1) of the Income Tax Act (Canada) (the "Act"). In general, income from the sale of property by a foreign affiliate in the course of the foreign affiliate's business constitutes active business income. However, paragraph 95(2)(a.1) deems certain income from the sale of property by a foreign affiliate to be income from a business other than an active business, and therefore taxable in Canada on an accrual basis as foreign accrual property income ("FAPI").

The draft legislative proposals include an exception to paragraph 95(2)(a.1) to ensure that certain securities transactions between a Canadian bank and certain of its foreign affiliates that are carried out in the course of the bank's business of facilitating trades for arm's length customers are not caught by this base erosion rule.  To qualify for the exception to paragraph 95(2)(a.1), a number of conditions must be satisfied, including:

  • certain types of securities cannot be owned by the Canadian bank's foreign affiliate for more than five days before effecting a trade;
  • the property must have a readily available fair market value and the property must be such that, if it were owned by the Canadian bank, it would be "mark-to-market property" as defined in the Act;
  • the foreign affiliate must be a regulated foreign bank or a regulated trader or dealer in securities; and
  • the terms and conditions of the purchase or sale of the property must be arm's length terms and conditions. 

The draft legislative proposals also include amendments that are intended to alleviate the tax cost to Canadian banks of accessing excess liquidity of their foreign affiliates for use in their Canadian operations. These amendments include a provision that allows certain foreign affiliates of a Canadian bank to use excess liquidity to make loans to their Canadian parent, or to acquire certain Canadian government debt securities, without the income earned in respect of such investments being taxed on an accrual basis as FAPI.  In addition, the amendments provide rules to ensure that the use of the foreign affiliate's excess liquidity does not cause the affiliate to have an "investment business" as defined in the Act, which would result in the income from that business being treated as FAPI.

The proposals apply to foreign affiliate taxation years that begin after October 31, 2012.  Interested parties may submit comments on the draft legislation until December 27, 2012.

[1] These amendments were initially announced by the federal government in the 2012 Budget Plan.

Contact the Author

For more information or to discuss a particular matter please contact us.

Contact the Author



    Receive email updates from our team