The Foreign Investment Entity (FIE) Rules, Part II

A fifth draft of the proposed FIE legislation, amending the Income Tax Act ("ITA"), was released in July 2005 and, although this legislation has not yet come into force, the rules are intended to apply for taxation years beginning after 2002.

In a prior issue of the Tax Bulletin, we assessed the general impact of the FIE rules, which operate as an anti-deferral mechanism designed to prevent Canadian taxpayers from earning passive income offshore without paying Canadian tax. In particular, the article focused on the income imputation rules that apply to foreign investments caught by the rules. Where the rules apply, an investment in a FIE will be taxed under one of three methods: the prescribed rate of return regime, the mark-to-market regime, or the accrual regime.