Canada: Canadian legislative changes in the international context
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Canada: Canadian legislative changes in the international context


Scott Wilkie

Janice McCart

We are accustomed to thinking of new developments as discrete events on the fiscal calendar, for example, budget measures, bespoke technical changes to the Income Tax Act in response to judicial decisions and the like. We are less inclined, standing back, to observe fiscal patterns, and Canadian tax law's situation in them. Yet, in performing the very valuable advisory function of anticipating where it all may be going and, in that vein, how to interpret and apply the law we have, patterns may indeed be highly significant. Occupying centre stage, at the moment, is the OECD's seminal substantive analytical report on base erosion and profit shifting. Addressing Base Erosion and Profit Shifting (BEPS) is a G20 inspired report by the OECD broaching the incompatibility, perhaps, of venerable notions of tax jurisdiction – which are found in transfer pricing, the permanent establishment notion, what it means to carry on business in a place, and in many other markers of tax presence – and the manner in which contemporary global business may be conducted. Of particular interest is the role played by intangibles and contracts to result in entrepreneurial return being earned by members of a corporate group presented as the risk takers, which may not necessarily be those conducting activities more closely aligned with customary tax jurisdiction tests.

Where does Canada fit in? Is this just another study of international tax jurisdiction, or is there more to it?

While there is no shortage of opinion and commentary, in Canada's case we suggest that the immediate legislative and treaty context supplies some indication of where Canadian tax law and its administration are headed and why, in some respects, the BEPS report is aligned contextually. This is of considerably more than academic interest. Awareness about the current international state of play in relation to evolving Canadian tax law, supplies valuable insight about how cross-border business activity should be conducted and documented to ensure that global groups do not stumble into an unexpected, even unwarranted Canadian tax present.

Canadian tax amendments are addressing important features of the Income Tax Act associated with base erosion and what commonly is referred to as surplus stripping. For example, the recently enacted foreign affiliate dumping rule targets the erosion of the Canadian tax base among other ways through deductible charges that are not matched by taxed foreign income, as well as transfers of property in ways that avoid dividend withholding tax. Upstream loan rules are directed at the redeployment of foreign earnings of Canadian groups in ways perceived to avoid Canadian tax that would arise if dividends of those earnings were paid to Canadian shareholders first. And group financing rules are changed to permit more latitude in the use of Canadian companies' financial resources by other members of their corporate groups as long as a high statutory rate of interest is charged.

These Canadian developments have amplified significance when understood in the larger international context that the BEPS initiative manifests. Countries, as tax jurisdictions, respectful of the legal organisation in which business activities are framed, are grappling with disconnections between how income is earned and whose income it really is. Recent Canadian legislative changes are in line with analytical sentiments found in the BEPS report. As important, those developments illustrate that is not necessary to abandon the tenets of international taxation to work within and modify them to address the sorts of concerns expressed by the OECD. Armed with this realisation, taxpayers would do well to consider, even reconsider carefully how they formulate their commercial arrangements with a forward looking awareness of the significance of pertinent Canadian and international developments.

Scott Wilkie (

Tel: +1 416 863 2948

Janice McCart (janice.mccart@blakes)

Tel: +1 416 863 2669

Blake, Cassels & Graydon

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