Canada: Selected international tax measures from the 2018 Canadian budget
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.
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