Foreign Affiliate Proposals - Some Welcome And Unwelcome Changes

On August 19,  2011, the Department of Finance (Finance) released extensive proposed amendments (2011 Proposals) to the foreign affiliate rules which, in some cases, replace a number of the more controversial amendments that were contained in the proposed amendments released on February 27, 2004 (2004 Proposals) and that may be viewed as a significant shift in tax policy. Many of the less controversial amendments contained in the 2004 Proposals, which replaced earlier proposals released in 2002, have been passed or included in other draft legislation packages. For a discussion of certain of the earlier proposals, see Tax Update dated January  22,  2010.

In the release accompanying the 2011 Proposals, Finance referred to the recommendation of the Advisory Panel on Canada's System of International Taxation (Advisory Panel) in December 2008 that changes be made to Canada's system of taxation to extend the exemption system to all active business income, regardless of