Canadian immigration laws and procedures. Guide for foreign and Canadian immigration law.

Other Considerations

A relieving change is proposed to allow certain intra-affiliate payments of interest and other amounts to be treated as active business income where the payment is made between foreign affiliates that are related to the Canadian taxpayer. Prior to the changes, interest payments were treated as active business income only where a Canadian taxpayer had a "qualifying interest" (at least 10% of the voting shares and equity value) in the foreign affiliate.

In addition to the retention of most of the rules proposed on December 20, 2002, relating to foreign exchange, the proposals contain a rule that prevents the denial of certain losses on shares of a foreign affiliate to the extent that they relate to offsetting currency gains realized by the Canadian corporate taxpayer on settling debt or redeeming shares that were originally issued to acquire the foreign affiliate shares.

Restrictive Covenants

Non-compete and similar payments are also considered, with rules that implement changes announced by the Department of Finance on October 7, 2003, and are a direct response to the FCA decision in Manrell v. R. [2003] 3 C.T.C. 50, which had held that certain payments for a non-compete agreement were not taxable. A restrictive covenant of a tax-payer means an agreement, an undertaking made or a waiver of an advantage or right (other than an agreement or undertaking for the disposition of the taxpayer's property) that affects, or is intended to affect, the acquisition or provision of property or services by the taxpayer (or by a non-arm's-length person), whether enforceable or not. The definition is very broad in scope and is not limited to a non-competition covenant given by a vendor in connection with the sale of a business or property. The grantor of a restrictive covenant will be required to include in its income all amounts in respect thereof that are received or receivable by either the grantor or a taxpayer with whom the grantor does not deal at arm's length. As a result, if consider-ation for a restrictive covenant is paid on an installment basis, the grantor will not be able to defer the resulting tax liability. Where the taxpayer and purchaser deal with each other at arm's length, there are three important exceptions to the income inclusion rule:

• The amount is required to be included (or would be so included if it were received in the year) in the taxpayer's employment income for the year.

• The taxpayer disposes of eligible capital property, and the taxpayer and the purchaser elect to treat any payment in consideration for a restrictive covenant relating to that business as part of the proceeds of disposition of such eligible capital property.

• The restrictive covenant is a non-competition covenant given by the taxpayer and is directly related to the disposition by the taxpayer of a capital property that is a partnership interest or a share of a corporation ("Eligible Interest") that carries on a business, the amount received for the restrictive covenant is included in the taxpayer's proceed of disposition of the Eligible Interest, the taxpayer and the purchaser elect to have this exception apply, and the amount received by the taxpayer does not exceed the difference between the amount that would be the fair market value of the taxpayer's Eligible Interest disposed of if all of the restrictive covenants that may reasonably be considered to relate to a disposition of an interest in the business by any taxpayer were provided for no consideration and the amount that would be the fair market value of the taxpayer's Eligible Interest disposed of if no covenant were granted by any taxpayer that held an interest in the business.