Canada's Federal Budget Does Not Address Cross-Border Income Trusts

March 25, 2013

Written By Robert D. McCue, Greg M. Johnson, and Thomas A. Bauer

The March 2013 Federal Budget did not contain any provisions aimed at cross-border income trusts (CBITs, also known as foreign asset income trusts, or FAITs). Mention was made, however, of a continued intention to implement the specified investment flow-through (SIFT) related changes announced in 2011 and committed to draft legislation last summer, including those that shut down the use of stapled stock as a means to avoid the SIFT rules.

The non-reference to CBITs in this Budget is worth noting for the following reasons:

• The Department of Finance has engaged in policy analysis with respect to CBITs.
• The 2013 Budget contained more tax anti-avoidance proposal than any budget for many years. The Government is shutting down a wide variety of domestic and international transactions that they perceive to be abusive and are using specific legislative amendments to do so. This appears to be a thorough house-cleaning.
• In light of the number and kind of anti-avoidance provisions the Budget contained, it is reasonable to conclude that if the Government had material policy concerns with regard to CBITs, they would have been subjected to the SIFT rules in the same way as stapled stock structures have been. The amendments to the SIFT rules required to accomplish this would be relatively easy to draft.

In light of the foregoing, the fact that this Budget does not address CBITs provides further confirmation that at present, they are acceptable to Finance from a policy perspective and unlikely to be legislatively challenged in Canada.

We have been asked by a variety of parties to confirm that the Budget proposals related to the extension of Canada's thin capitalization rules to certain trusts and partnerships does not affect CBITs. Those rules will restrict the deductibility of interest by trusts or partnerships that carry on business in Canada and deduct interest against taxable income in Canada. CBITs do not carry on business in Canada, and hence do not fall into that category. We note that each CBIT that has come to market to date (Eagle Energy Trust, Parallel Energy Trust, Argent Energy Trust, and Crius Energy Trust) was structured to carry on business exclusively in the United States, and to comply with the U.S. version of Canada's  thin capitalization rules.

Bennett Jones LLP lawyers have acted with respect to each of the CBIT transactions to come to market so far.

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