As international transactions have become increasingly prevalent in our global economy, more attention has been focused on the classification of foreign entities for purposes of determining the tax consequences arising from an international transaction. In Canada, as in most jurisdictions, the classification of entity (corporation, trust, or partnership) is critical for determining tax consequences. Entity characterisation principles established under Canadian law may differ from those established in other jurisdictions. Thus, for the purposes of determining the Canadian tax consequences arising to a foreign entity operating in Canada, consideration must be given to the characterisation of the foreign entity under Canadian tax law.
To provide parties with certainty, the CRA has historically issued rulings and technical interpretations pertaining to entity classification. However, the CRA has recently announced that it will discontinue this practice The rationale underlying the CRAs new approach is that the classification of a foreign entity involves a consideration of the foreign laws governing the entity, which is a matter that the CRA cannot advise upon. On a going-forward basis, where a ruling involving a foreign entity is sought by a taxpayer, the taxpayer will be required to include in the ruling request a description of the relevant foreign law and a representation regarding the character of the foreign entity under Canadian tax law.
The CRA has recently confirmed that the appropriate approach for determining the classification of a foreign entity under Canadian tax law is to apply the following two-step process:
- Determine the characteristics of a foreign entity under the governing commercial law; and
- Compare those characteristics with the characteristics of a corporation, partnership, trust, or collective arrangement formed under Canadian commercial law, to assign the foreign entity to the domestic category that seems the best match.
This approach places the onus on taxpayers to make a determination based on a mixed question of fact and law. Consequently, to obtain some level of comfort regarding the tax consequences arising from a transaction involving one or more foreign entities, it would be prudent for taxpayers to obtain both Canadian and home jurisdiction legal opinions where entity classification is an issue.
Bill Maclagan (firstname.lastname@example.org) and Soraya Jamal (email@example.com)
Blake, Cassels & Graydon, Vancouver
Tel: +1 604 631 3300
Fax: +1 604 631 3309