Getting it right on technical amendments

  • May 26, 2023

Two recent letters by the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada make recommendations on technical amendments to the Income Tax Act.

Foreign share-for-share exchanges and amalgamations

The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, in a letter to Finance Canada, suggests ways to improve legislative changes proposed in August 2022 to the Income Tax Act and the Income Tax Regulations (Technical Amendments). The proposed amendments address foreign share-for-share exchanges and amalgamations. The most salient are summarized below.

Purpose test

Subsection 85.1(3) of the ITA allows a Canadian-resident corporation to transfer shares of a foreign affiliate to another foreign affiliate on a tax-deferred basis (as a rollover). Subsection 85.1(4) outlines the circumstances in which rollover treatment that would otherwise be available under subsection 85.1(3) is denied. The Joint Committee notes that, in its current form, this has been viewed as an adequate safeguard.

The proposals seek to remove the purpose test currently in subsection 85.1(4). The proposed version would simply require that the initial transfer of shares be part of a series of transactions that includes another disposition of the shares of the first affiliate (or certain other properties). “Given that a ‘series of transactions’ can be extremely broad and open to varying interpretations,” the letter says, the Joint Committee recommends keeping the purpose test to avoid creating uncertainty.

Subsequent dispositions, excluded property

The proposed amendments to subsections 85.1(4) and 87(8.3), which outlines the circumstances in which the rollover treatment under subsection 87(8) is denied, include a significant expansion to the scope of subsequent transactions that are considered to be subsequent dispositions.

The Joint Committee recommends limiting the scope to “subsequent dispositions by a foreign affiliate of the taxpayer of (i) shares of the first affiliate, (ii) property substituted for shares of the first affiliate, or (iii) shares of another foreign affiliate of the taxpayer that derive any of their fair market value from property referred to in (i) or (ii).” In addition, the amendments should introduce an element of proportionality so that a denial of rollover treatment only applies in proportion to the subsequent disposition.

The letter also recommends that the excluded property test should be applied with reference to the excluded property status of the property that is disposed of on the subsequent disposition. “The additional (existing) requirement to test the excluded property status of the property of the predecessor corporation immediately before the merger should be eliminated.”


In a separate letter to Finance Canada, the Joint Committee commented on proposals that would amend the withholding tax rules in Part XIII that apply to partnerships.

The current legislation deems a partnership to be a person resident in Canada for payments made by the partnership to a non-resident person if those payments are deductible in computing the partnership’s Canadian-source income. The proposed amendments would expand this definition by focusing on the specific partners and the extent to which their partnership income is subject to Canadian tax.

This is more than a mere technical amendment, the letter states, for “it significantly changes the basis of the application of withholding tax to partnerships” and this would create serious practical issues. In some cases, the Joint Committee warns that compliance may be extremely difficult, maybe impossible to achieve.

That’s why it recommends that the Department of Finance “consider the potential impact of the proposals in more depth and consult further with both tax and investment community stakeholders before the proposals move forward.”