Canada: Canadian 2014 Budget: A Focus on base erosion and profit shifting
Soraya M Jamal
Canada's 2014 budget gives a clear indication of the Canadian government's desire to address perceived limitations in, and abuses of, Canada's international tax system. In particular, Budget 2014 contains a number of measures which further Canada's "ongoing efforts to protect the Canadian tax base and ensure tax fairness". While the proposed measures align with the OECD's base erosion and profit shifting initiatives, the government has reaffirmed its intention to retain an internationally competitive tax system.
Following a short period public consultation, Budget 2014 announced that the Canadian government proposes to adopt a domestic rule to prevent treaty shopping which would apply to all Canadian tax treaties.
The proposed rule would permit the Canadian government to deny a treaty-based benefit if one of the main purposes for undertaking a relevant transaction was to obtain that benefit. It would be presumed that the main purpose test would be satisfied if the relevant treaty income was primarily used to pay an amount to a person who would not have been entitled to an equivalent or more favourable treaty benefit had the person received that income directly. As a relieving measure, it is proposed that the treaty-benefit may be provided to the extent reasonable in the circumstances. A safe harbour would apply in certain circumstances such as where the relevant treaty income is received as a result of substantial active business activities carried on in the relevant treaty jurisdiction.
The government has initiated a public consultation in respect of these proposals. The consultation outcome, along with the OECD's upcoming BEPS recommendations, will be relevant in determining Canada's approach to treaty shopping. While it is unclear if the proposals will be implemented, existing cross-border arrangements should be examined as Budget 2014 contains no indication that transitional relief will be provided to such arrangements.
Tax planning by multinational enterprises
Budget 2014 also announced a public consultation on issues relating to international tax planning by multinational enterprises. The consultation concentrates on five questions which consider the impact of tax planning by multinationals and the government's role in respect thereof.
Additionally, public input is being sought on the effective collection of sales tax on e-commerce sales by foreign-based vendors. In particular, consideration is being given to whether foreign-based vendors should be required to register with Canadian tax authorities and charge sale tax on e-commerce sales to Canadians.
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