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BEPS, intangibles and Canadian tax reporting – old questions, new direction


Scott Wilkie and Janice McCart, of Blake, Cassels & Graydon, believe the continuing examination by bodies such as the OECD of how international tax rules operate means that tax reporting by Canadian taxpayers should be as thorough as possible.

The OECD published “Addressing Base Erosion and Profit Shifting” on February 12 2013, shortly after the first of our two part article drawing attention to the implication of the OECD’s interest in base erosion for Canadian tax reporting.

This G20-initiated report notes that “…the international common principles drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment ...”, posing serious questions about “…the integrity of the corporate income tax”. The report coincides with a communiqué issued by the G20 finance ministers and central bank governors at their Moscow meetings on February 15 and 16.

Clearly, as the report’s commentary reflects, the compatibility of well-known international tax rules, conventions and customary practices is being subjected to thoughtful scrutiny in light of business practices and forms of organisation in which the locations where business activity take place may not clearly align with where entrepreneurial return is considered to be earned. Most recently, this realisation has been encapsulated in the OECD’s continuing study of intangibles, reflected in its June 2012 non-consensus draft report and the unprecedented number of submissions made by interested parties before the OECD’s public consultation in November 2012.

What does all this mean for tax compliance in Canada? For business activities conducted by and within global, or multinational, business groups, it means that there is a premium on carefully explaining, including thorough documentation, a taxpayer’s outlook on how its business is conducted, and on carefully identifying and measuring the group contributors to that business. Most commonly, this kind of functional analysis is associated with the general requirements of transfer pricing documentation; in Canada the rules are set out in subsection 247(4) of the Income Tax Act. These basic descriptors, however, should be seen by prudent taxpayers as merely the starting point suggesting, directionally, how a taxpayer’s storyought to be told.

Evident in the BEPS and intangibles reports is a concession of sorts that the usual markers of tax jurisdiction may be outdated, if not broken. They are perceived as being inadequate, perhaps, to show where business activity takes place, particularly when value within a corporate group may arise or be transmitted in ways that these markers, as they are commonly understood according to antecedents dating back many decades as the OECD observes, and countries’ tax laws may not readily capture. At the same time, the OECD’s Transfer Pricing Guidelines, and indeed the BEPS and intangibles reports do not suggest that the fundamentals of business organisation and contracts, at least as a starting point, should not be respected. This is consistent with Canadian tax law which generally appeals to legal rather than economic substance.

Can we find direction for how Canadian tax law applies, and may be expected to apply in this roiling re-evaluation of how countries, among themselves, parse a shared global tax base? We think so.

In the short term, without dramatic legislative change or tax treaty amendment, the attention must be focused on of carefully evaluating and documenting, including thorough explanatory memoranda and the like, a taxpayer’s and its group members’ commercial connections and proximity to Canada with reference to long-standing tests gauging when, where and how business is conducted.

Complementing this sort of an analysis would be a healthy respect for a dynamic construction of existing jurisdictional rules, imagining how they might be applied to modern business without being abandoned. While historically this kind of scrutiny might more readily be associated with transfer pricing documentation, in a post-BEPS era, it is more than that – not only interpreting a taxpayer’s activities in light of applicable legal tests but, indeed, interpreting those tests, also, in light of the activities.

Scott Wilkie ( and Janice McCart (, partners, in the Toronto office, of Blake, Cassels & Graydon, principal Tax Disputes correspondents for Canada.

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