Most international tax treaties entered into by Canada include a tax information exchange provision (e.g., Article XXVII of the Canada-US Tax Treaty) that enables the Canada Revenue Agency (“CRA”) to obtain pertinent tax information about a particular taxpayer from a foreign country or jurisdiction. These types of provisions provide a useful tool for CRA in administering and enforcing the Act with respect to taxpayers that have assets in or income from a foreign country or jurisdiction. However, Canada does not have tax treaties with many of the “tax haven” countries or jurisdictions that CRA is most concerned with. As a result, CRA does not have the necessary tools to effectively address tax evasion in countries or jurisdictions where tax evasion is perceived to be most prevalent.
For that reason, Canada has been aggressively negotiating Tax Information Exchange Agreements (“TIEAs”) with these “tax haven” countries or jurisdictions. TIEAs are bilateral agreements in which two countries or jurisdictions undertake to exchange tax information that is relevant to the administration and enforcement of the domestic tax laws of each country or jurisdiction. TIEAs are a means by which Canada may combat tax evasion without having to negotiate a full-blown tax treaty with a particular “tax haven” country or jurisdiction.
In 2007, in order to entice these countries or jurisdictions to negotiate TIEAs with Canada, the Canadian federal government offered a “carrot” to those countries or jurisdictions willing to sign a TIEA. The Canadian federal government offered a tax exemption for dividends paid by a foreign affiliate in the TIEA country or jurisdiction to a Canadian resident corporation from active business income earned in the TIEA country or jurisdiction. At the same time, Canada announced a significant “deterrent” (i.e., the “stick”) for those countries or jurisdictions that may be reluctant to negotiate a TIEA. The Act was amended such that active business income earned by controlled foreign affiliates in a non-TIEA country or jurisdiction is treated as foreign accrual property income (“FAPI”) and unfavourably taxed on an accrual basis. The FAPI rules apply if a TIEA with Canada is not signed after 5 years from the date on which TIEA negotiations began or after 5 years from the date on which Canada sought in writing to enter into TIEA negotiations. These deadlines may be extended if Canada was in the course of negotiating a TIEA with a particular country or jurisdiction on March 19, 2007.
This aggressive strategy seems to have finally worked as Canada has announced the signing of numerous TIEAs in the past few months. For example, in June, 2010, Canada announced that TIEAs had been signed with the Bahamas, Bermuda, the Cayman Islands, Dominica, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines and the Turks and Caicos Islands. Although these TIEAs have been signed by both countries or jurisdictions, they shall not enter into force until they are ratified, accepted or approved by the relevant government of each country or jurisdiction in accordance with their respective laws. Also of note, in July, 2010, Canada announced the start of TIEA negotiations with Brunei, Belize, Costa Rica and Liechtenstein.
TIEAs signed by Canada are broadly worded such that a variety of information including bank information and ownership information may be requested by CRA from the TIEA country or jurisdiction. As a result of this increased activity with respect to TIEAs, taxpayers with assets in or income from these TIEA countries or jurisdictions should seek the legal advice of a tax professional as solutions may be available to address any potential tax or criminal liability. On a positive note, there may be tax planning opportunities to take advantage of the exempt surplus rules (i.e., the “carrot” provided by the Canadian federal government) for foreign affiliates in TIEA countries or jurisdictions.
Although there are many uncertainties with respect to TIEAs as there are no TIEAs in force; it is clear that the use of TIEAs is an integral part of Canada’s plans to combat unreported offshore accounts or activities and that TIEAs will have a long-lasting effect on Canadian taxpayers with foreign investments.
As of September 2010, the status of TIEAs is as follows:
In Force: None
Signed but Not Yet in Force (Date TIEA signed in brackets):
Bahamas (June 2010)
Bermuda (June 2010)
Cayman Islands (June 2010)
Dominica (June 2010)
Netherlands Antilles (August 2009)
Saint Lucia (June 2010)
St. Kitts and Nevis (June 2010)
St. Vincent and the Grenadines (June 2010)
Turks and Caicos Islands (June 2010)
Under Negotiation (Deadline to sign TIEA in brackets)
Anguilla (August 2014)
Aruba (May 2014)
Bahrain (June 2014)
BelizeJ (une 2015)
British Virgin Islands (December 2013)
Brunei (May 2015)
Costa Rica (June 2015)
Gibraltar (May 2014)
Guernsey (May 2014)
Isle of Man (December 2013)
Jersey (December 2013)
Liberia (February 2015)
Liechtenstein (July 2015)
San Marino (September 2014)