International Taxation

22 mars 2013

( Disponible en anglais seulement )

IN THIS SECTION:

International Tax Evasion and Aggressive Tax Avoidance

High on
the priority list of the G20 countries is the renewed fight against tax evasion
and avoidance, money laundering and the proceeds of crime. The Budget specifically
proposes a number of measures that are designed to combat international tax
evasion and international aggressive tax avoidance.

International Electronic Funds Transfers

The Budget
proposes that the Tax Act, the Excise Tax
Act (Canada) and the Excise Act, 2001 (Canada) be amended to
require that certain financial intermediaries report to the Canada Revenue
Agency (“CRA”) international electronic funds transfers (“EFTs”) of $10,000 or
more.

This new
proposed measure targets taxpayers that may deliberately engage in foreign
financial transactions in order to make it more difficult for the CRA to verify
the accuracy of their tax reporting. It is meant to be used by the CRA as a
tool to discourage taxpayers who might seek to move funds outside of Canada in
an attempt to conceal those funds or the income they produce in order to avoid
taxation.

Essentially,
the reporting requirements would be the same as the current ETF reporting
requirements imposed under the Proceeds
of
Crime (Money Laundering) and
Terrorist Financing Act
(Canada) which includes banks, credit unions,
caisses populaires, trust and loan companies, money services businesses and
casinos. The EFT reports will be required to be made to the CRA no later than
five working days after the date of transfer and will require financial intermediaries
to provide information on the person conducting the transaction, on the
receiver of the funds, on the transaction itself and on the financial
intermediaries facilitating the transaction. This proposal is intended to
commence in 2015. It begs the obvious question as to why it should take well
over 18 months for this proposal to come into force.

Stop International Tax Evasion Program

Finally,
Canada has a whistleblower program aimed to catch tax evaders with the help of “ordinary”
Canadians. Call it, “it pays to squeal.”
The CRA will be launching the Stop International Tax Evasion Program pursuant
to which the CRA will pay rewards to individuals with knowledge of major
international tax non-compliance when they provide information to the CRA that
leads to the collection of outstanding taxes due.

The
proposal calls for the CRA to enter into a contract with an individual that
will provide for the payment of a reward only if the information results in
total additional assessments or reassessments exceeding $100,000 in federal
tax.

The
contract will provide for a reward payment of up to 15% of the federal tax
collected (e.g., not including penalties, interest and provincial taxes). Reward
payments will be made only after the taxes have been collected and will only be
paid where the non-compliant activity involves foreign property or property located
or transferred outside Canada, or transactions conducted partially or entirely
outside Canada.

To be
eligible, individuals seeking rewards will have to meet certain program
criteria. The idea for such a program is not new. The United States has been
highly successful with this type of program. An example is the UBS/Birkenfeld
matter. With the help of a whistleblower, hundreds of millions of dollars were
‘recovered’ by the IRS. We can only imagine what impact this new program will
have in Canada.

Extended Reassessment Period: Form T1135

Under the
current tax regime, a Canadian-resident individual, corporation or trust (or
partnership, in some cases) that owns “specified foreign property” at any time
during a year with an aggregate cost in excess of $100,000 must file a Form
T1135: Foreign Income Verification Statement. “Specified foreign property” is
defined as including a wide range of income-earning foreign property such as
funds situated, deposited or held outside Canada and tangible property situated
outside Canada. There are specific exceptions for property used in carrying on
an active business, personal-use property, and certain other types of property
outlined in the Tax Act.

For most
taxpayers, the normal reassessment period under the Tax Act is three years,
during which time the CRA can audit and reassess liability for tax. The Budget
proposes to extend this period by a further three years if:

  • the taxpayer has failed to
    report income from a specified foreign property on the taxpayer’s annual income
    tax return; and
  • the taxpayer did not file the
    Form T1135 on time, or a specified foreign property was not identified, or was
    improperly identified, on the Form T1135.

The Budget
states that the purpose of this new measure is to provide the CRA with more
time to assess the risk that foreign income has not been reported accurately in
respect of foreign property. This measure will apply to the 2013 and subsequent
taxation years.

Revised Form T1135

Form
T1135 requires a taxpayer to provide general information regarding the location
of specified foreign property and the income generated from the property. The
Budget proposes to revise Form T1135 to require more detailed information,
including:

  • the name of the specific
    foreign institution or other entity holding funds outside of Canada;
  • the specific country to which
    the property relates; and
  • the foreign income generated
    from the property.

This
measure is intended to improve the use of Form T1135 in allowing the CRA to
determine whether taxpayers have correctly reported foreign income. Revised Form T1135 will be required to be
used for the 2013 and subsequent taxation years.

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Improvements to Foreign Reporting Requirements: Form T1135

In the
past, taxpayers indicated that they had difficulties in filling out Form T1135
because they found the instructions to be unclear and because the form could
not be filed electronically. The Budget proposes certain improvements to the
Form T1135 filing process that are designed to help taxpayers meet their filing
obligations. Effective for the 2013
taxation year, the CRA will remind taxpayers on their Notices of Assessment of
their obligation to file a Form T1135 if they have answered “yes” on their
income tax returns to the question of whether they had specified foreign
property at any time during the taxation year with an aggregate cost in excess
of $100,000. The CRA will also be clarifying
the instructions on the form and is in the process of developing a system to
allow Form T1135 to be filed electronically.

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Thin Capitalization Rules

The thin
capitalization (“thin cap”) rules within
the Act protect the Canadian tax base from erosion through excessive interest
deductions in respect of debt owing to “specified non-residents” (as defined in
the Tax Act).

In its
2008 report, the Advisory Panel on Canada’s System of International Taxation
made a number of recommendations relating to the thin cap rules, including
extending the rules to partnerships, trusts and Canadian branches of
non-resident corporations.

Budget
2012 introduced certain amendments to the thin cap rules including, among other
things, extending the scope of the thin cap rules to partnerships with one or
more Canadian-resident corporate partners and the reduction of the debt-to-equity
ratio from 2-to-1 to 1.5-to-1.

The
current thin cap rules generally limit the deductibility of interest expense of
a Canadian-resident corporation (or a partnership with one or more
Canadian-resident corporate partners) in circumstances where the amount of debt
owing to specified non-residents exceeds a 1.5-to-1 debt-to-equity ratio.

The
current Budget proposes further amendments to the thin cap rules by extending
the scope of their application to Canadian-resident trusts, and non-resident
corporations and trusts that carry on business in Canada.

Canadian Resident Trusts

The Budget
proposes that the existing thin cap rules will be extended to Canadian resident
trusts and will be amended to accommodate the legal nature of trusts. A trust’s
“equity” for the purposes of the thin cap rules will generally consist of
contributions to the trust from specified non-resident beneficiaries plus the
tax-paid earnings of the trust, less any capital distributions from the trust
to specified non-residents. Trust beneficiaries will be used in place of
shareholders in determining whether a person is a specified non-resident in
respect of the trust.

Where
interest expense of a trust is not deductible as a result of the application of
the thin cap rules, the trust will be entitled to designate the non-deductible
interest as a payment of income of the trust to a non-resident beneficiary
(i.e., the recipient of the non-deductible interest). In such a case, the trust
will be able to deduct the designated payment in computing its income, but the
designated payment will be subject to non-resident withholding tax under Part
XIII of the Tax Act and potentially tax under Part XII.2, depending on the
character of the income earned by the trust.

This
proposal will also extend the thin cap rules to partnerships with one or more
Canadian resident trusts as partners.

Similar
to debt owed directly by the trust, where these rules result in an amount being
included in computing the income of a trust, the trust will be entitled to
designate the included amount as having been paid to a non-resident beneficiary
as income of the trust.

Since
some trusts may not have complete historical information, any trust that exists
on Budget Day will be able to elect to determine the amount of its equity for
thin cap purposes as at Budget Day based on the fair market value of its assets
less the amount of its liabilities. Each beneficiary of the trust would then be
considered to have made a contribution to the trust equal to the beneficiary’s
share (determined by reference to the relative fair market value of their
beneficial interest in the trust) of this deemed trust equity. Contributions to
the trust, tax-paid earnings of the trust and distributions from the trust on
or after Budget Day would then increase or decrease (as appropriate) trust
equity for thin capitalization purposes.

The
1.5-to-1 debt-to-equity ratio will not change for Canadian resident trusts and
partnerships with one or more Canadian resident trusts as partners.

Application Date

This
measure will apply to taxation years that begin after 2013 and will apply with
respect to existing as well as new borrowings.

Non-Resident Corporations and Trusts

The Budget
also proposes to extend the thin capitalization rules to non-resident
corporations and trusts that carry on business in Canada. The application and
effect of the thin capitalization rules for a non-resident carrying on business
in Canada will be similar to those in respect of a wholly-owned Canadian
subsidiary of a non-resident.

However,
since a Canadian branch is not a separate person from the non-resident
corporation or trust, the branch does not have shareholders or equity for
purposes of the thin capitalization rules. Therefore, the thin capitalization
rules for non-resident corporations and trusts will differ from the rules for
Canadian-resident corporations in certain respects.

A loan
that is used in a Canadian branch of a non-resident corporation or trust will
be an outstanding debt to a specified non-resident for thin capitalization
purposes if it is a loan from a non-resident who does not deal at arm’s length
with the non-resident corporation or trust.

In
addition, a debt-to-asset ratio of 3-to-5 will be used, which parallels the
1.5-to-1 debt-to-equity ratio used for Canadian-resident corporations.

Where the
non-resident is a corporation, the application of the thin capitalization rules
could increase its liability for branch tax under Part XIV of the Tax Act.

A
non-resident corporation or trust that earns rental income from certain
Canadian properties may elect to be taxed on its net income under Part I of the
Tax Act rather than being subject to non-resident withholding tax under Part XIII
on its gross rental income. The election allows the non-resident to compute its
taxable income as if it were a resident of Canada, with such modifications to
the tax rules as the circumstances require. Where such an election is made, the
thin cap rules for non-resident corporations and trusts, rather than those for
Canadian residents, will apply in computing the non-resident’s Part I tax
liability.

This
proposal will also extend the thin cap rules to apply to partnerships with one
or more non-resident corporations or trust as partners. Any income inclusion
for a non-resident partner that arises as a consequence of the application of
the thin cap rules will be deemed to have the same character as the income
against which the partnership’s interest deduction is applied.

Application Date

This
measure will apply to taxation years that begin after 2013 and will apply with
respect to existing as well as new borrowings.

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Treaty Shopping

The
Federal Government expressed its concern about treaty shopping generally and, in
particular, by third country residents who create intermediary entities in
treaty countries in order to access treaty benefits offered by Canada to treaty
country residents. So far, the Federal Government has not been successful in
challenging treaty shopping cases (e.g., Prevost
Car
and Velcro cases) and in
addressing its concerns regarding the significant risks that treaty shopping
represents for the Canadian tax base.

While no
specific tax measures are proposed in the Budget, the Federal Government
announced its intention to consult on possible measures that would address its
concerns with treaty shopping and protect the integrity of Canada’s tax
treaties while preserving a business tax environment that is conducive to
foreign investment. A consultation paper will be publicly released to provide
stakeholders with an opportunity to comment on possible measures.

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International Banking Centres

The Budget proposes to repeal the
International Banking Centre (“IBC”) rules because the policy rationale no
longer applies and there has been virtually no use of the provision in recent
years. The IBC rules were introduced in 1987 to attract to Canada banking
activity normally conducted abroad and to exempt prescribed financial
institutions from tax on certain income earned through a branch or office in
the metropolitan areas of Montreal and Vancouver.

This measure will apply to taxation years
that begin on or after Budget Day.

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