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Canada: The changing international tax landscape: More legislative changes, more context



Scott Wilkie

Janice McCart

The internationalisation of business in the context of the OECD base erosion and profit shifting (BEPS) report coincides with a reconsideration by tax jurisdictions around the world of how they define, and importantly confine, tax base. This may be manifest in far reaching reflections on how traditional international tax notions associated with "jurisdiction to tax" and "source" should be recalibrated, recognising that there is no "natural order" for either. Or, it may be captured by targeted legislative changes that alone may not seem very consequential but taken together have directional significance. Either way, taxpayers need to be alert to the advent of these inevitable changes and aware not only of the impact of specific tax changes, but also of the directional winds as they arrange and document their affairs to anticipate how tax authorities may view them.

In the present context, the Canadian tax rules already are robust. In addition to comprehensive transfer pricing and documentation rules, the Canadian Income Tax Act contains bespoke base erosion rules in the foreign affiliate context that pay close attention not only to whether the Canadian tax base conceivably is being reduced by intramural dealings, but whether, nevertheless activities giving rise to a foreign affiliate's income are within its functional capabilities where it purports to carry on business.

The foreign affiliate dumping rules which we mentioned in our last note are similarly directed. And the Canadian Act deals with hybridity in the context of transactions thought to give rise to inordinate or unsupportable foreign tax credit.

The recent budget proposed the introduction of a variety of other rules that are compatible with the existing suite of base protection. These include proposals for tighter reporting by taxpayers of foreign investments, and within the realm of hybridity that features in the OECD's present base erosion work and two other recent reports, rules targeted at derivative and like transactions that are considered to alter the character of income and when it is recognised (synthetic dispositions and character conversion transactions).

The thin capitalisation rules, policing the distribution effects of deducting interest paid to lenders having a substantial interest in the payer, are amplified to deal with trusts and Canadian branches of non-residents. Additionally, the budget documents foresee a review of Canada's treaty policy concerning treaty shopping "to protect the integrity of Canada's tax treaties while preserving a business tax environment that is conducive to foreign investment".

Whether Canadian law reflects these broader global developments, or is merely coincident, it is critical for taxpayers to understand that Canadian tax developments are indeed in sync with the more compressed world to which the OECD and its other members are responding and their responses. Such an awareness will be vital in formulating forward thinking advice.

Scott Wilkie (

Tel: +1 416 863 2948
Janice McCart (janice.mccart@blakes)

Tel: +1 416 863 2669

Blake, Cassels & Graydon

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