The 2018 Canadian federal budget (budget 2018) was
introduced on February 27 2018. A major theme of budget 2018 is
the Canadian government's commitment to combating what it
perceives to be aggressive international tax avoidance.
Budget 2018 notes that the Canadian government will provide
additional funding to the Canada Revenue Agency (CRA) to use
the financial information it receives from other jurisdictions
through the OECD/G20 common reporting standard. With these
additional resources, it is proposed that the CRA will expand
its offshore compliance efforts through improved risk
assessment systems and business intelligence.
Budget 2018 also announced certain measures and actions to
strengthen Canada's international tax system, including:
- Expanding the cross-border anti-surplus
stripping regime. Canada's existing rules contain an
anti-avoidance rule aimed at preventing a non-resident
shareholder of a Canadian corporation from undertaking
reorganisations to extract, free of Canadian tax, the
corporation's surplus in excess of the existing paid-up
capital of its shares. To address what the government
perceives to be inappropriate tax planning, budget 2018
proposes to extend these existing rules to partnerships and
trusts by adding 'look-through' rules;
- Targeting the controlled foreign affiliate
rules. Where a Canadian taxpayer earns passive income through
a controlled foreign affiliate, the taxpayer is subject to
Canadian tax on that foreign accrual property income (FAPI),
irrespective of whether such funds are repatriated to Canada.
Budget 2018 introduces measures designed to limit the
benefits of certain 'tracking arrangements' under the FAPI
rules (for a fulsome discussion of these proposals, see
'Tracking arrangement proposals: the foreign affiliate rules
and segregated portfolio companies', April 2018 issue).
Budget 2018 also restricts the availability of an exception
to a rule which deems certain income of a foreign affiliate
from trading or dealing in indebtedness to be included in
FAPI. In addition to requiring the Canadian taxpayer to be a
regulated financial institution, it must now also meet
certain minimum capital requirements;
- Reaffirming commitment to base erosion and
profit shifting efforts. Budget 2018 outlines certain efforts
by the Canadian government, including:
- Committing to taking steps, in 2018, to
enact the Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting
(MLI) and to bringing it into force. The approaching entry
into force of the MLI means that taxpayers should plan for,
among other things, the introduction of the principal purpose
test, which adds an 'anti-treaty shopping' rule to many of
Canada's tax treaties. The application of the MLI to any
particular tax treaty will still require that the particular
treaty partner ratify the MLI and provide the requisite
notice to the OECD. To date, only five countries have done
so; and
- Adopting the revised OECD Transfer Pricing
Guidelines, with a commitment to issuing additional guidance
in 2018.
Other notable measures in Budget 2018 with international tax
implications include:
- Shortening the time period within which a
Canadian taxpayer is required to provide detailed information
on its foreign affiliates from 15 months to six months after
the taxpayer's taxation year-end;
- Expanding the reporting requirements for
trusts, including non-resident trusts, to collect information
relating to beneficial ownership; and
- Giving the CRA additional time to reassess
by extending limitation periods to:
- Six or seven years, in the case of a
taxpayer with income arising in a connection with a foreign
affiliate; and
- Nine or 10 years, in respect of an
adjustment of a loss carried back from a subsequent taxation
year of a taxpayer relating to (among other things) non-arm's
length transactions with non-residents.
While budget 2018 did not contain any reaction to recent US
tax reform, the Canadian government has expressed an intention
to conduct analysis to assess its potential impact on Canada.
It will be interesting to see if this analysis results in any
specific Canadian measures.
|
|
Soraya
Jamal |
Evan
Schmid |
Soraya Jamal (soraya.jamal@blakes.com),
Vancouver, and Evan Schmid (evan.schmid@blakes.com),
Toronto
Blake, Cassels & Graydon LLP
Tel: +1 604 631 3305 and +1 416-863-4341
Website: www.blakes.com