The Corporate Tax Planning Law Review: Canada
Canada is an attractive jurisdiction in which to carry on business because it has a skilled labour force, a stable economy and political system, and well-developed capital markets. From a taxation perspective, Canada has a comparatively low corporate tax rate, a wide treaty network, a sophisticated tax system, relatively generous provisions relating to financing costs and a partial exemption system relevant to many controlled foreign corporations (foreign affiliates) of Canadian multinationals that earn active business income.
Canada has a 'two-tiered' domestic system of corporate taxation whereby active business income earned by small business corporations is subject to preferential corporate tax rates, while larger corporations are subject to the general combined federal and provincial corporate tax rates. The rates applicable to larger corporations have remained relatively stable in recent years and currently range from 23 per cent to 31 per cent depending on the provincial allocation of income.2
With respect to foreign affiliate taxation, Canada has a partial exemption system applicable to active business income earned by foreign affiliates that carry on business in countries with which Canada has a treaty or Tax Information Exchange Agreement (TIEA) in force. An accrual system of taxation applies in respect of passive investment income earned by controlled foreign affiliates under the Canadian foreign affiliate rules.
In recent years, the Organisation for Economic Co-operation and Development (OECD) has become increasingly focused on preventing base erosion and profit shifting (BEPS) opportunities for multinational enterprises. Canada, as a member of the OECD, has participated in these initiatives and ratified the Multilateral Instrument3 (MLI) in 2019. While Canadian courts have generally been reluctant to deny the availability of treaty benefits under one of Canada's many bilateral tax treaties on the basis that the taxpayer engaged in 'treaty shopping,' it remains to be seen whether the MLI will have a material impact on the availability of treaty benefits under Canada's extensive treaty network.
Domestic taxation and local developments
i Entity selection and business operations
Business may be conducted in Canada through many different types of arrangements, although corporations and partnerships are probably the most common forms of business organisation. Many factors influence the ultimate decision about how to conduct a business, including the nature of the activity, industry practice, regulatory regime and tax treatment. Some common arrangements are described below.
In Canada, businesses of any significant size are conducted most commonly through corporations,4 which can be established under provincial, territorial or federal law. Consistent with the principle that a corporation has a legal personality separate from its shareholders, a corporation may own property, incur obligations and carry on business. Absent an agreement to guarantee the corporation's obligations, the shareholders' liabilities are generally limited to the capital they have invested or, in certain circumstances, to the funds that have been distributed to them by the corporation. A corporation must file certain information, including directors' names, on the public record, must annually hold a shareholders' meeting and must provide copies of its financial statements to the shareholders. Shareholders also have rights to receive certain additional information from the corporation upon request.
Corporations can be incorporated quickly in Canada, and without significant cost, once certain basic decisions are made, including identifying the terms of shares to be authorised, the directors and the corporate name, with the default being a numbered corporation. Consistent with the principle of limited liability, the name must include 'Limited,' 'Incorporated,' 'Corporation' or a corresponding abbreviation.
Generally, directors must be individuals, although it is possible to appoint a corporation as a director in certain Canadian jurisdictions. While directors do not necessarily need to be residents of Canada, some corporate statutes require a minimum percentage of Canadian-resident directors (typically 25 per cent or greater). Directors generally do not have to be shareholders.
Corporations may authorise and issue common shares only or shares in more than one class, with each class conferring on the shareholders different rights (e.g., dividends, votes, redemption and conversion).5 Corporations generally have no minimum capital requirements, subject to any applicable regulatory regime (e.g., for financial institutions). As a general rule, shares cannot be issued until the subscription price is fully paid in money, property or past services, except in the province of Nova Scotia where non-fully paid shares may be issued.
Corporations may be privately owned or offer their shares and other securities to the public. Securities offerings are regulated by securities commissions in each province (although many policies are coordinated to facilitate interprovincial compliance) and, if the securities are to be listed for trading on a public market, by that market. Both English and French are official languages in Canada, and offering documents delivered to residents of Quebec must be provided in French.
Public corporations must provide investors with annual audited financial statements, have an audit committee, and hold annual shareholders' meetings. Prior to its annual shareholders' meeting, a public corporation must send an information circular to its shareholders containing prescribed information, including information about the matters to be considered at the meeting and executive compensation.
The corporate statutes of three Canadian provinces6 also permit unlimited liability companies (ULCs) to be established. As the name suggests, shareholders of a ULC may be liable for its debts and other liabilities. The principal advantage of a ULC is that it may be disregarded or treated as a partnership (i.e., a flow-through entity) under United States check-the-box regulations. However, ULCs are treated as corporations, and thus taxpayers, for Canadian tax purposes. Under the Canada–United States Income Tax Convention (1980), payments made by a ULC to US residents may not be eligible for reduced rates of withholding if the anti-hybrid rules in that treaty apply.7
Although further details are provided below, in general terms, Canadian-resident companies are taxed on their worldwide income from all sources and must file returns annually. Generally, any corporation incorporated under Canadian law will be deemed to be a tax resident of Canada, subject to the 'tie-breaker' rules in an applicable tax treaty.
Partnerships are another common form of business arrangement, and are widely used in real estate, private equity and professional businesses. A partnership is generally described as a relationship between persons carrying on business in common with a view to profit. Partnerships may be general partnerships, limited partnerships or limited liability partnerships.
A general partnership is formed by contract, typically governed by the laws of a province, and has no separate legal personality. Each partner is wholly liable for all of the debts of the partnership.
A limited partnership is formed under the laws of a particular province on obtaining a certificate of limited partnership. All limited partnerships must have at least one general partner that is responsible for managing the partnership activities and has unlimited liability for partnership obligations. A limited partner's liability is limited to its capital contribution (including any capital it agreed to contribute), unless a limited partner participates in the control of the partnership business, and, thus, assumes unlimited liability.
Limited liability partnerships share features of a limited partnership and a general partnership, but generally are available only to the business of a profession when permitted by the legislation governing such profession.
Partnerships are contractual relationships and, although not required for general partnerships, are typically governed by written partnership agreements. Accordingly, the members may agree to alter rights and obligations as between themselves. Partners have flexibility in providing for the sharing of profits, for the financing of the partnership activities and how those activities will be managed.
While a partnership is not a taxpayer, its income or loss from each source is generally computed as if it were a separate person, and each partner must include in its income its share of the partnership income or loss for the partnership fiscal year ending in the partner's taxation year. The partnership activities are considered to have been carried out by the partners for the purposes of identifying the source of the income, which may affect the rate of applicable tax.
Under special rules (SIFT rules), certain publicly traded partnerships that carry on business activities or earn certain types of income may be liable for tax on that income on the same basis as a public corporation. Any after-tax income of the partnership is treated as a dividend payable to the partners.
Generally, limited partners are permitted to deduct their share of a partnership loss only to the extent their partnership investment is 'at risk.' Any losses denied may generally be carried forward to future years for deduction when the partner's investment becomes 'at risk.'
Non-resident partners may be obligated to file a Canadian tax return and pay Canadian income tax on their share of the business income earned by the partnership. A partnership with non-resident partners will be subject to withholding tax on certain payments it receives (e.g., dividends and royalties), but a resident partner's share of such withholding taxes will generally be credited against its income tax payable for the year.
Statutory rules generally prevent the deferral of partnership income through selection of partnership fiscal periods ending after the partner's taxation year-end and tiering of partnerships with different fiscal periods.
Business activities are also sometimes carried on through trusts, most commonly in the real estate and resource industries. Trusts are taxable entities, but may reduce their income by distributing it annually to the beneficiaries, who are then taxed on their share of the distributed income. Unlike a partnership, however, a trust cannot flow any losses through to its beneficiaries and, with limited exceptions, the source of the income to the beneficiary is income from a trust rather than income of the source (character) earned by the trust. The SIFT rules may apply to certain trusts that carry on business or earn certain types of income. However, REITs that meet certain conditions are exempt from the SIFT rules.
Canadian permanent establishment (PE)
A non-resident corporation may carry on business directly in Canada through a permanent establishment (PE). A PE is not a separate entity from its foreign 'parent'. A foreign corporation that carries on business in Canada generally must register in each of the provinces in which the business is carried on and must designate an agent for service in that province.
Non-resident corporations that carry on business in Canada are subject to tax (including branch tax) on the income from such business (subject to treaty relief) and must file Canadian tax returns reporting their income for the year and other amounts.
Pension plans are a significant source of institutional capital in Canada. A pension plan can be established as a trust or a corporation. Canadian pension plans are subject to federal or provincial pension benefits legislation which, among other things, restricts a pension plan from making certain investments.
For example, Canada's federal pension benefits statute prohibits a pension plan from investing its money in the securities of a corporation carrying more than 30 per cent of the votes that may be cast to elect the board of directors of the corporation. This '30 per cent rule' does not apply to 'investment corporations', 'real estate corporations' or 'resource corporations', each of which is defined in the pension benefits legislation and is subject to certain restrictions on its activities, investments and capital structure. In addition, investments by pension plans can be structured to comply with the 30 per cent rule while nonetheless permitting a pension plan to maintain a significant equity interest in a corporation.
Pension plans are generally exempt from Canadian income tax. To qualify for tax-exempt status, a pension plan must qualify as a 'registered pension plan' for Canadian tax purposes, which requires the plan to register with the Canada Revenue Agency (CRA) and meet certain statutory requirements.
A subsidiary of a registered pension plan may also qualify for tax-exempt status, provided that it is a 'pension corporation' for Canadian tax purposes. Generally speaking, a corporation that qualifies as an investment corporation, real estate corporation or resource corporation under the pension benefits legislation should qualify as a pension corporation for income tax purposes. However, there are some subtle nuances between the applicable tests under the pension benefits legislation and the Income Tax Act that should be considered when seeking to obtain tax-exempt status in respect of an investment corporation, real estate corporation or resource corporation.
ii Domestic income tax
Determination of taxable profit
Canadian-resident corporations are taxed on their worldwide income from all sources, including business, property and capital gains. Income from a business or property is the profit from such activities calculated in accordance with 'well accepted principles of business (or accounting) practice,' adjusted as permitted or required by the tax legislation. As a practical matter, most corporations start with their accounting profits as determined under generally accepted accounting principles (GAAP), although those principles are not determinative.
The tax legislation mandates certain adjustments. For example, the rates at which assets are depreciated for accounting purposes will generally differ from the rates at which capital cost allowance (tax depreciation) may be deducted in computing income for tax purposes.
On incorporation, a corporation may choose any taxation year-end, but no taxation year can exceed 53 weeks in length. Moreover, once selected, a corporation's taxation year-end cannot be changed unless the CRA agrees. However, certain events will result in a deemed taxation year-end (e.g., an acquisition of control) following which a different taxation year-end may be selected.
Some of the most common adjustments to accounting profits to compute income for tax purposes are described below.
To be deductible for tax purposes, an expense must be incurred for the purpose of earning income, reasonable, not on account of capital (except to the extent expressly permitted by the tax legislation) and not contingent.
Certain expenses that might satisfy these tests nonetheless may be prohibited from being deducted. For example, no deduction is permitted in respect of stock option benefits conferred on employees and business entertainment expenses are only partially deductible. Costs related to vacant land held for development generally must be capitalised. However, certain expenses that might be considered capital expenditures are deductible (albeit over time), including costs incurred to issue shares or borrow money.
In addition, in the context of non-arm's-length transactions, an amount deducted in respect of an outlay or expense must be paid by the end of the second taxation year following the taxation year in which the deduction was made. Otherwise, the amount of the expense is added back to the taxpayer's income.
Depreciation (capital cost allowance (CCA))
Depreciation taken in computing accounting profits must be added to income for tax purposes. Canada has a CCA system for depreciating assets such as buildings, machinery and equipment; properties of a similar nature are typically included in the same pool for CCA purposes. With few exceptions, CCA may be claimed in respect of property on a declining balance basis at rates that range from 4 to 100 per cent.
CCA is recaptured in income if a depreciated asset is disposed of for an amount in excess of the balance of the CCA pool to which it belongs. A deductible loss arises if the last asset in the pool is disposed of and an undeducted pool balance remains.
Capital gains and income
Capital gains may arise on the disposition of capital property (including depreciable property, where the proceeds exceed the original cost). Only 50 per cent of a capital gain (referred to as a 'taxable capital gain') is included in income. Capital losses may be realised on the disposition of non-depreciable capital property, and 50 per cent of such a loss (referred to as an 'allowable capital loss') is deductible, but only against taxable capital gains.
Private corporations add the untaxed half (net of 50 per cent of any capital losses) to a special account (capital dividend account), the balance of which may be paid to its Canadian-resident shareholders as a tax-free capital dividend. In addition, taxable capital gains realised by a Canadian-controlled private corporation (CCPC) are included in investment income, which is subject to a special higher rate of tax that is refundable to the extent that the CCPC pays dividends to its shareholders.
Losses are generally categorised as net capital losses or non-capital losses.8 Net capital losses (being one-half of a capital loss not deducted in the year realised) generally may be carried back for three taxation years and carried forward indefinitely, but are only deductible against taxable capital gains realised in those years.
Non-capital losses generally may be carried back for three taxation years and may be carried forward for up to 20 taxation years. Non-capital losses generally may be deducted against income from any source, including business, property or taxable capital gains.
Income tax is imposed by both the federal government and each province or territory in which a business has a PE. The combined federal and provincial rate of tax on business income ranges from approximately 23 to 31 per cent. A CCPC enjoys a preferential tax rate of approximately 9–13 per cent (depending on the relevant provincial or territorial rates) on active business income less than a specified threshold (generally C$500,000).9 While CCPCs are also liable for a higher rate of tax on investment income (46.7–54.7 per cent), a portion of that tax is refunded to the extent that dividends are paid by the CCPC.
As previously discussed, a corporation is a separate taxpayer from its shareholders for Canadian tax purposes. However, when a corporation pays a dividend to a Canadian-resident shareholder, the rate of tax payable on such dividend is reduced to account for the tax paid by the corporation. This system of integration seeks to ensure that the combined rate of tax payable at the corporate and shareholder levels is approximately equal to the shareholder's personal marginal tax rate.
Tax returns for corporations
Canada has a self-assessment system of taxation. Although each province assesses provincial income taxes, the federal government administers the provincial income taxes on behalf of most provinces. A corporation must file an income tax return for each taxation year, and such return is due within six months after the corporation's taxation year-end. Most corporations with gross revenue in excess of C$1 million must file their returns electronically.
The typical taxation year is 12 months, but a corporation is deemed to have a taxation year-end immediately before an amalgamation, an acquisition of control of the corporation, or the corporation ceasing to qualify as, or becoming, a CCPC.
Corporations must pay monthly instalments on account of income taxes (quarterly for small CCPCs), and must pay the balance due by the end of the second month following the taxation year-end (third month for small CCPCs). While not all corporate taxpayers are audited, any taxpayer may be selected for audit. Large corporations rated as high risk by the CRA (based on industry, record, etc.) typically are audited annually.
The statutory limitation period for reassessing a corporation is four years (three years for CCPCs) after the initial assessment of tax, but longer periods are permitted for certain types of income, transactions with non-arm's-length non-residents, and to accommodate loss carry-backs and similar adjustments. In certain circumstances in which misrepresentations are made, the limitation period is vitiated altogether. A corporation that disagrees with an assessment or reassessment of tax may object (generally, within 90 days). If the assessment or reassessment is upheld, the taxpayer may take the dispute to the Tax Court of Canada, from which an appeal to the Federal Court of Appeal is available, as of right. Thereafter, the appeal may be heard (with leave) by the Supreme Court of Canada.
Tax clearances and rulings
Tax clearance certificates are generally required where a non-resident disposes of taxable Canadian property. Where such a certificate is required and has not been obtained by the vendor, the purchaser is obligated to withhold a portion of the purchase price of the property and remit it on behalf of the non-resident's Canadian tax liability. In general terms, taxable Canadian property is limited to Canadian-situated real property (including mineral resource properties, oil and gas properties, and timber limits) and shares and partnership or trust interests that, at any time in the 60-month period preceding the disposition, derived more than 50 per cent of their value from such property. It also includes property used or held in the course of carrying on a business in Canada and inventory and certain intangible property of such a business.
In certain cases, an applicable bilateral income tax treaty may provide relief from taxation and the requirement to obtain a clearance certificate. A non-resident that disposes of taxable Canadian property generally must file a Canadian income tax return reporting the disposition.
Tax clearance certificates are not typically otherwise required, but may be advisable before assets are distributed to shareholders or trust beneficiaries. Failure to do so may result in those who make the distribution being liable for unpaid taxes to the extent of the value of the assets distributed.
The CRA has a number of well-established published administrative practices that generally may be relied on by the public. The CRA will also provide advance income tax rulings on particular tax issues to named taxpayers who apply for a ruling in advance of the relevant transaction. While such rulings do not have the force of law, the CRA generally considers itself bound by its rulings with respect to the taxpayer who makes the application.
iii International tax
A corporation will be deemed resident in Canada if it is incorporated in a Canadian jurisdiction. However, a corporation incorporated outside Canada may be resident in Canada if its central management and control is exercised in Canada. Central management and control is generally exercised where the board of directors has its meetings. Tiebreaker rules in Canada's treaties may determine the jurisdiction in which a corporation is resident if it would otherwise be considered to be resident in more than one country. For example, under the Canada–United States Income Tax Convention (1980), a corporation otherwise resident in both Canada and the United States will be deemed resident in its jurisdiction of incorporation; otherwise the competent authorities must decide. Under the Canada–United Kingdom Income Tax Convention, the competent authorities must decide in all cases. Other treaties may default to the place of effective management and control of the corporation.
Branch or permanent establishment
Under Canada's tax legislation, a non-resident that carries on business in Canada will be liable to pay Canadian income tax on its taxable income earned in Canada regardless of whether it has a PE in Canada. Certain activities are deemed to constitute carrying on business in Canada (including soliciting orders or offering anything for sale in Canada regardless of where the contract is completed). However, in most of its treaties, Canada has generally agreed not to impose tax on business income earned by a non-resident except where the non-resident carries on business through a PE in Canada.
As a proxy for dividend withholding tax, Canada imposes a 25 per cent branch profits tax on non-residents that carry on business through a PE to the extent branch profits are not reinvested in the branch business. The rate is generally reduced to 5 per cent under Canada's treaties, and some treaties provide for a partial exemption (e.g., under the Canada–United States Income Tax Convention (1980), the first C$500,000 of branch profits is exempt).
Tax incentives, special regimes and relief that may encourage inward investment
Both the federal government and provincial governments provide targeted incentives for particular business activities. These may take the form of tax credits, forgivable loans, tax holidays, subsidies or accelerated write-offs for qualifying depreciable properties (e.g., equipment used for renewable energy generation or manufacturing and processing). Corporations in the oil and gas, mining and renewable energy industries are permitted to renounce certain deductible expenses to shareholders who subscribe for 'flow-through shares' to fund corporate expenditures, permitting the shareholders to deduct the expenses rather than the corporation. There are relatively generous incentives for expenditures on 'scientific research and experimental development' in the form of immediate deductions for qualifying expenditures and investment tax credits.
Holding company regimes
Dividends are typically tax-free when paid from one Canadian corporation to another.10 Although dividends paid to non-residents are subject to withholding tax at the statutory rate of 25 per cent, many bilateral tax treaties reduce the rate of withholding to 5 per cent for significant corporate shareholders. Moreover, capital may be returned to shareholders as a legal reduction in capital free of Canadian withholding tax regardless of whether the paying corporation has significant retained earnings (see below).
Dividends received by Canadian corporations from non-resident corporations are included in income, subject to foreign tax credits and certain deductions available for intercorporate dividends under the Canadian foreign affiliate rules.
Although complex, the foreign affiliate rules exempt from Canadian tax dividends paid by a foreign affiliate to a Canadian corporation to the extent of the foreign affiliate's earnings from an active business carried on by it in a country with which Canada has a tax treaty or tax information exchange agreement (TIEA). Certain 'passive income' arising from inter-affiliate payments may be deemed active business income for this purpose.
However, under this regime, Canadian residents are required to include, on an accrual basis, their share of any foreign accrual property income (FAPI) earned by a controlled foreign affiliate (CFA). FAPI includes passive income, but also is deemed to include income from certain businesses whose principal purpose is to derive income from property (e.g., rents, royalties, interest, dividends and licence fees).
Canada has foreign affiliate dumping (FAD) rules that make it less attractive for foreign multinationals to establish a Canadian holding corporation for non-Canadian foreign affiliates. In general terms, an investment by a Canadian corporation that is controlled by a non-resident corporation, non-resident individual, non-resident trust or non-arm's-length group of such taxpayers, in a foreign affiliate (or a Canadian corporation that derives more than 75 per cent of its value from foreign affiliates) may reduce cross-border paid-up capital or trigger a deemed dividend and corresponding withholding tax, subject to limited exceptions.
While Canada does not have a special IP regime, tax incentives in the form of tax credits or write-offs may be available for development of IP in Canada.
iv Capitalisation requirements and funding structure considerations
Canadian corporations are typically funded by a combination of debt and equity (including common and preferred shares). Preferred share dividends may result in the issuer of such shares being liable to a special tax (partially creditable against ordinary income tax) where the preferred shareholder does not have a significant interest in the dividend payer. This special tax is intended to discourage corporations that are not in a tax-paying position from using preferred share financing in lieu of debt financing.
Canada restricts the deduction of interest paid to 'specified non-residents' (i.e., non-resident shareholders, or non-resident persons who do not deal at arm's length with shareholders who, alone or together with non-arm's-length persons, own shares representing at least 25 per cent of the votes or value of the corporation). In general terms, interest paid to specified non-residents will not be deductible to the extent that such specified non-residents hold debt of the payer11 exceeding 1.5 times the relevant 'equity factors'.
Equity includes the corporation's non-consolidated retained earnings at the beginning of the taxation year, and its monthly average paid-up capital attributable to shares held by, and its monthly average contributed surplus contributed by, specified non-resident shareholders.12 Because only paid-up capital and contributed surplus attributable to direct shareholders are included in equity, debt is typically advanced by specified non-residents to the first-tier Canadian corporation rather than a corporation further down the corporate chain (see the discussion below regarding potential reductions to paid-up capital).
In recent years, Canada has extended the thin capitalisation rules, with modifications, to debt of partnerships, trusts and branches of non-resident corporations.
Any interest that is not deductible because of these rules will generally be treated as a dividend paid to the specified non-resident for withholding tax purposes.
Back-to-back (B2B) loan rules target circumstances in which an intermediary that deals at arm's length with a Canadian borrower is funded (or given security interests in respect of property to support the loan) by a non-resident (ultimate funder) with whom the borrower does not deal at arm's length. These rules are intended to prevent arrangements that are perceived as circumventing the thin capitalisation and withholding tax rules. Where the B2B loan rules apply, their general effect is to treat the loan, for withholding tax and thin capitalisation purposes, as if it were made directly to the borrower by the ultimate funder.
Deduction of finance costs
Financing costs are typically considered to be on capital account and therefore not deductible except to the extent expressly permitted by the tax legislation. Like other expenses, they are also deductible only to the extent they are incurred for the purpose of earning income, reasonable and not contingent.
Financing costs related to the issuance of shares or debt (such as commitment fees, investment banker fees, underwriting fees and placement fees) typically are deductible on a straight-line basis over five taxation years, subject to proration for short taxation years.
Interest is deductible only to the extent it is payable in respect of money borrowed, or in respect of an amount payable for property acquired, for the purpose of earning income. Interest paid on money borrowed to acquire common shares typically would meet this test. Where a Canadian corporation borrows money to acquire another Canadian corporation and the two corporations merge, the interest generally will be deductible against the earnings of the merged corporation.
Subject to the thin capitalisation rules, simple interest is deductible on an accrual basis, but compound interest is deductible only when paid. Prepayment penalties related to early retirement of debt are typically treated as interest and are deductible over the remaining term of the debt rather than in the year paid.
Restrictions on payments
Dividends must be declared by the directors of a corporation and generally may be paid only to the extent that the directors are satisfied that the corporation will meet the relevant solvency test in the governing corporate statute. Although there are variations among the corporate statutes, a common solvency test is that the corporation must, after paying the dividend, be able to pay its liabilities as they become due and have assets with a realisable value not less than the sum of its liabilities and the stated capital of its shares.
Return of capital
Corporations may distribute paid-up capital to shareholders as a return of legal stated capital regardless of whether the corporation has undistributed income. A distribution of capital by a private corporation will not be taxable but will reduce the shareholder's tax cost of the shares. A gain will arise only if the tax cost is reduced below zero as a result.
A distribution of capital by a public corporation will be treated as a taxable dividend absent an applicable exception. Exceptions include distributions of capital occurring on a reorganisation of capital or the business, or distributions following, and funded from the proceeds of, a disposition of assets outside the ordinary course of the business.
Distributions of capital usually require shareholder approval and the satisfaction of solvency tests contained in the corporate statute governing the corporation.
v Common ownership – group structures and intercompany transactions
Ownership structure of related parties
Canada does not accommodate consolidated income tax returns, and, thus, each taxpayer must compute its own income (or loss). However, closely connected corporations must share certain tax benefits (e.g., the C$500,000 low-rate income threshold for a CCPC must be shared among associated CCPCs).
Following a study of a formal loss transfer system or consolidated tax reporting regime for corporate groups, the government announced that moving forward with a formal system is not a priority. While loss trading is generally precluded, well-accepted techniques may be used to transfer losses within an affiliated corporate group. That being said, in certain circumstances, anti-avoidance rules may prevent the transfer of losses from a lower-tier partnership to an upper-tier partnership.
Controlled foreign affiliates
As discussed above, shareholders of a CFA must include in income, on an accrual basis, their share of FAPI earned by the CFA. Otherwise, income earned by a foreign affiliate generally is not taxed in Canada unless repatriated to Canada.
Domestic intercompany transactions
While Canada does not have a comprehensive domestic transfer pricing regime, the consideration paid in respect of a non-arm's-length transfer of property may be adjusted to equal the fair market value of the transferred property. In some circumstances, the adjustments are one-sided such that an expense may be reduced (or receipt may be increased) without a corresponding adjustment to the income of the recipient (payer) of the amount. Unlike transactions subject to Canada's transfer pricing rules (see below), contemporaneous documentation is not required for purely domestic transactions.
In addition, certain anti-avoidance rules prevent taxpayers from generating losses in non-arm's-length scenarios. For example, any loss arising on a transfer of capital property between affiliated persons is denied, but is reflected in the cost base of the property to the acquirer such that the denied loss can be realised if and when the property is transferred outside the affiliated group.
International intercompany transactions
Canada's transfer pricing rules apply to transactions between Canadian residents (or non-residents carrying on business in Canada) and non-residents with whom they do not deal at arm's length. The rules generally follow the OECD guidelines. Their objective is to preserve the Canadian tax base by ensuring that Canadian taxpayers do not inappropriately reduce income (and thus tax liability) through advantageous or disadvantageous pricing with non-arm's-length persons.
These provisions permit the CRA to make adjustments to any amounts relevant to taxation of the Canadian resident where the terms and conditions of the transaction differ from those that would have been agreed to by arm's-length persons. The Canadian resident has contemporaneous documentation obligations, and failure to meet these obligations may result in the imposition of penalties.
Recent legislative amendments provide that Canada's transfer pricing rules take precedence over certain specific anti-avoidance rules, such as the thin capitalisation rules.
Withholding on outbound payments (domestic law)
Canada imposes withholding tax at a statutory rate of 25 per cent on most types of passive income paid to non-residents, including interest, dividends, management fees, rents, royalties, trust and estate distributions, and payments for restrictive covenants (e.g., non-competition covenants). This rate of withholding tax may be reduced under an applicable bilateral income tax treaty.
Domestic law exclusions or exemptions from withholding on outbound payments
Canada generally does not impose withholding tax on interest paid to non-residents who deal at arm's length with the Canadian-resident payer unless the interest is 'participating debt interest' (i.e., interest computed with reference to revenue, cash flow, dividends, profits, commodity price or production from property). Interest that is not deductible pursuant to the thin capitalisation rules is recharacterised as a dividend for withholding tax purposes. (See above for a general discussion of the back-to-back loan rules and their impact on withholding tax.)
Dividends received from foreign affiliates
Canada's system for taxation of dividends received from foreign affiliates operates largely as an exemption system. In this regard, active business income earned by a foreign affiliate in a country with which Canada has a tax treaty or TIEA may be repatriated to its Canadian corporate shareholders as a dividend without any further Canadian tax.
vi Third-party transactions
Sales of shares or assets for cash
Generally speaking, a sale of shares or assets for cash is a taxable event for Canadian tax purposes, subject to the loss restriction rules discussed above that may apply in respect of non-arm's-length transactions. Accordingly, a capital gain or loss is typically realised in respect of a disposition of shares or other assets that are capital property for cash. Moreover, a taxpayer will realise a capital gain in respect of an otherwise tax-deferred transaction described below to the extent that they receive cash consideration in excess of the cost base of the transferred property. Thus, a taxpayer may have the flexibility to realise part of an accrued capital gain on an asset or share sale by, for example, electing to receive a portion of the sale proceeds in cash and the remainder in shares.
Assets typically can be transferred between Canadian corporations or into Canadian partnerships on a tax-deferred basis if the transferee issues equity to the transferor and a tax-deferral election is made. Similarly, shares of one foreign affiliate may generally be transferred on a tax-deferred basis to another foreign affiliate in exchange for shares of the acquiring affiliate.
Corporations can be 'merged' on a tax-deferred basis in Canada through an amalgamation, provided both are taxable Canadian corporations. Amalgamations generally require the corporations to be governed by the same corporate statute (e.g., the same provincial statute or the federal statute). However, it is not difficult to continue a corporation from one Canadian jurisdiction to another with shareholder approval.
Spin-off transactions can be effected on a taxable or tax-deferred basis, although in the latter case extensive conditions must be satisfied and restrictions may be placed on the corporation that spins off the assets as well as the corporation that is the subject of the spin-off.
It is also possible to carry out a winding-up on a tax-deferred basis, but generally only in respect of a winding-up of a wholly owned subsidiary into its parent corporation.
Availability of tax attributes
As a general matter, where an acquirer purchases property pursuant to a tax-deferred transaction, the acquirer obtains the existing tax attributes of the acquired property. However, this general rule is subject to several complex anti-avoidance rules that reduce the tax attributes of acquired property in various circumstances.
Where two corporations 'merge' by way of amalgamation, the tax attributes of the two merging corporations are generally carried over to the merged corporation, subject to there not being an acquisition of control of either merging corporation.13
Where an acquisition of control has occurred, the acquired corporation has a deemed taxation year-end immediately prior to the acquisition of control and accrued losses on most assets are deemed realised in that year. Thereafter, the utilisation of losses is restricted. Net capital losses, as well as any non-capital losses incurred in the course of earning income from property (rather than from a business), will expire unless used in the taxation year ending immediately prior to the acquisition of control. Non-capital losses incurred in the course of carrying on a business may be carried forward for deduction in subsequent taxation years only if the loss business is carried on for profit or with a reasonable expectation of profit throughout the taxation year in which the loss is to be deducted. In such a case, the loss is deductible against income (but not taxable capital gains) from the loss business or certain 'similar' businesses. Similar rules apply to the carry-back of losses from post-acquisition of control taxation years to pre-acquisition of control taxation years.
In the taxation year ending immediately prior to an acquisition of control, a corporation may elect to 'step up' the tax cost of capital property (including depreciable property) it owns to fair market value by deeming a disposition of such property for the amount it designates (not in excess of fair market value), thereby generating income or taxable capital gains against which the pre-acquisition of control losses may be deducted.
There are similar rules relating to trusts – the loss restriction event rules being tied to changes in beneficiaries.
Though only applicable in non-arm's-length situations, on a winding-up of a wholly-owned subsidiary into its parent corporation, the parent corporation may be able to 'step-up' the cost base of certain non-depreciable property acquired from the subsidiary on the winding-up.
Acquisitions of Canadian corporations by non-residents
Typically, but not universally, a Canadian corporation will be established to acquire a Canadian target. This approach facilitates the deduction of interest expense associated with the acquisition financing against the target's earnings through a post-acquisition merger of the acquirer and target. Secondly, a non-resident acquirer typically wants to establish cross-border paid-up capital to maximise the opportunity to repatriate funds free of Canadian withholding tax. Finally, in certain circumstances, the acquirer will be able to 'bump' the tax cost of the target's non-depreciable capital property to fair market value. This may facilitate a sale, or a distribution to the foreign parent, of the asset free of Canadian tax.
However, paid-up capital may be reduced where a Canadian-resident corporation controlled by a non-resident corporation uses capital, retained earnings or borrowed funds to make an investment in a foreign affiliate (or in a Canadian corporation that derives 75 per cent or more of its value from foreign affiliates) under Canada's FAD rules. If the investment in the foreign affiliate exceeds the paid-up capital, the excess may be deemed a dividend paid to the non-resident controller.
Continuing into Canada
Corporations that are established outside Canada and continue into Canada generally will receive a 'step up' in the cost of their assets to fair market value, and generally thereafter will be treated as if they had been incorporated in Canada.
Provided that the governing corporate law permits it, corporations may continue from one jurisdiction to another. A Canadian corporation that emigrates to a jurisdiction outside Canada and ceases to be resident in Canada for tax purposes generally will be considered to have disposed of all of its assets for fair market value proceeds, and to have realised any resulting income or losses in the taxation year that is deemed to end immediately before it emigrates. In addition, the corporation will be liable for a special departure tax, analogous to a dividend withholding tax, levied at 25 per cent on the corporation's surplus (subject to reduction to an applicable treaty rate). The tax is applied to the excess of the fair market value of the corporation's assets over the total of the paid-up capital of its shares and its debts or other amounts payable outstanding at that time.
vii Indirect taxes
Taxes on goods and services
Canada levies a federal goods and services tax (GST) – a value added tax – at a rate of 5 per cent. Although the GST is imposed widely, input tax credits are intended to ensure that intermediaries receive a credit for the GST they pay so that the GST is borne only by the final user in the supply chain. Most provinces have adopted a harmonised sales tax (HST) based on the GST, administered for those provinces (other than Quebec, which has its own tax administration) by the federal government.
Of the non-participating provinces, Alberta does not impose a sales tax, and each of British Columbia, Manitoba and Saskatchewan levy and administer their own retail sales tax.
Property imported into Canada may be subject to customs or excise duties as well as GST/HST, although Canada is party to several free trade agreements.
Many provinces (and some municipalities) levy a separate tax on the transfer of land within the province (or municipality). Municipalities typically levy annual property taxes on owners of real property, based on the assessed value of commercial and residential real property.
Personal income tax and social security contributions
Personal income tax rates imposed by provinces and the federal government can be significantly higher than corporate rates. The rates are progressive, increasing as income levels rise, but individuals with very low income may pay little or no income tax. The highest combined personal income tax rates in Canada are approximately 54 per cent.
Employers are required to deduct tax at the source from remuneration paid to employees and remit the tax on behalf of the employee. In addition to federal and provincial income tax, individuals and their employers are required to make contributions to the federal public pension and employment insurance programmes. Employers are also subject to provincial payroll and social security levies that vary among the provinces.
International developments and local responses
i OECD-G20 BEPS initiative
In 2019, Canada ratified the MLI. Canada initially chose to adopt the minimum standards in the MLI plus a binding arbitration provision for treaty disputes, stating that Canada has accepted the principal purpose test as an interim measure regarding treaty abuse but will consider limitation of benefits provisions in its treaty negotiations.
Canada adopted the following additional provisions in 2019:
- a one-year holding period test for shares to benefit from treaty-reduced rates for dividends;
- a one-year lookback test in determining whether shares derive their value principally from immovable property; and
- the use of certain factors by competent authorities to resolving dual residency.
As a result, certain provisions of the MLI came into force for covered tax agreements in January 2020.
ii Taxation of the digital economy
As a member of the OECD, Canada is involved in the multilateral process to develop international standards for the taxation of digital services. The current government indicated in its 2019 re-election platform that it plans to introduce a new federal digital services tax but it has not yet done so.
However, effective 1 July 2021, the scope of the GST/HST will be extended to require non-resident vendors that have no physical presence in Canada and sell digital products or services to Canadian consumers to register for GST/HST and collect and remit tax on taxable sales to Canadian consumers. Similarly, distribution platform operators (and non-resident vendors that do not sell through a distribution platform) will be required to collect and remit GST/HST on sales to Canadian purchasers by non-registered vendors of goods shipped from a fulfilment warehouse or other location in Canada.
iii Tax treaties
Canada's extensive treaty network consists of more than 90 treaties that typically reduce the rate of withholding tax on passive income. Generally speaking, Canada's tax treaties follow the OECD Model Tax Convention on Income and Capital.
Dividend withholding is typically reduced to 15 per cent (5 per cent where the shareholder is a corporation with a significant investment in the dividend payer), and rent (other than from real property), royalty and trust distributions are generally reduced to a 15 per cent rate. Some treaties eliminate withholding on particular types of royalties, and most characterise management fees as business profits governed by the PE article. Where the domestic exemption from withholding tax does not apply, Canada's treaties typically reduce the rate of withholding on interest to 10 per cent.
Canada continues to expand its network of TIEAs and negotiate changes to its existing treaties and additional treaties.
iv Covid-19 pandemic
In response to the covid-19 pandemic, the Canadian government announced significant fiscal measures in an effort to mitigate the economic impact of the pandemic on Canadian individuals and businesses. The measures targeting Canadian businesses include the provision of interest-free loans and interest-bearing loans with favourable repayment terms by the Business Development Bank of Canada, a Crown corporation whose mandate involves providing capital and advisory services to small and medium-sized Canadian businesses. The Canadian government also announced that it would defer Canadians' tax filing and remittance obligations and provide temporary wage and rent subsidies for businesses.
Under the temporary wage subsidy programme, the Canadian government currently provides a subsidy to eligible Canadian employers (regardless of size) who experienced a decline in monthly gross revenue relative to their 2019 gross revenue for that same month.14 The government recently announced that the temporary wage subsidy will run until at least 5 June 2021 and the maximum subsidy will remain equal to 75 per cent of an employee's wages, up to a maximum remuneration figure of C$1,129 per week.15
The temporary rent subsidy program provides eligible businesses (including certain non-profits and charities) with a subsidy of up to 65 per cent of eligible expenses16 paid to arm's-length persons, up to a maximum expense figure of C$75,000 per location and C$300,000 per applicant. Similar to the temporary wage subsidy, the rent subsidy is scaled up as a business' gross revenue decline increases. An additional 'top-up' subsidy of 25 per cent is available to businesses that were required to close or whose activities were significantly restricted due to a covid-19-related public health order.17
The Queen v. Alta Energy Luxembourg SARL18
The Supreme Court of Canada has granted the Crown's application for leave to appeal the decision of the Federal Court of Appeal in Alta Energy. The narrow question before Canada's top court involves the application of the domestic general anti-avoidance rule (GAAR) to a fairly straightforward instance of treaty-shopping. As the MLI was not relevant to the years at issue, the decision of the Supreme Court can be expected to leave open the question of its impact on cases with similar facts to Alta Energy.
However, because it has been nearly a decade since the Supreme Court of Canada considered the GAAR, the Court's decision in Alta Energy is likely to have a lasting impact on the application of the rule in the years to come.
The Alta Energy case involved a reorganisation whereby shares of a Canadian resident operating corporation held by a US LLC were transferred to a Luxembourg SARL (the taxpayer). The shares of the taxpayer were in turn held by a partnership the partners of which were the shareholders of the US LLC. The Canadian resident operating company was subsequently sold and a large capital gain was realised.
Pursuant to an exemption provided in the bilateral tax treaty between Canada and Luxembourg (the Canada–Luxembourg treaty), Canada was not entitled to tax the capital gain.19 The taxpayer paid variable interest on a loan to the partnership that caused it not to pay any Luxembourg tax in respect of the gain. But for the reorganisation, Canada would have been entitled to tax the gain under the provisions of the Canada–United States Income Tax Convention (1980).
The CRA reassessed the taxpayer on the basis that the GAAR applied to deny the tax benefit achieved by interposing the taxpayer between the Canadian operating company and its US-resident investors. In order for the GAAR to apply in respect of one of Canada's bilateral tax treaties, a transaction or series of transactions must:
- result in a tax benefit;
- involve one or more 'avoidance transactions'; and
- constitute an abuse of the provisions of the treaty.
At issue in Alta Energy was whether an abuse of the Canada–Luxembourg treaty occurred.
At the Federal Court of Appeal, the Crown advanced three arguments in support of its position that the taxpayer had abused the Canada–Luxembourg treaty. First, the Crown argued that a Luxembourg resident must invest amounts in a Canadian company in order to qualify for the exemption. Second, the Crown argued that the exemption was not intended to benefit entities that do not have the potential to realise income in Luxembourg, such as the taxpayer due to its variable rate loan. Third, the Crown argued that the exemption was not intended to benefit entities that do not have any commercial or economic ties to Luxembourg. The Federal Court of Appeal rejected each of these arguments on the basis that the Canada–Luxembourg treaty simply states that the exemption is available to a 'resident' of Luxembourg, and there was no basis upon which to conclude that the rationale underlying the definition of 'resident' for purposes of the Canada–Luxembourg treaty should be extended to include any of the additional conditions proposed by the Crown. The Court held that the provisions spoke for themselves, and their rationale could be found in their text.
If the unanimous decision of the Federal Court of Appeal is upheld by the Supreme Court of Canada, it would provide lower courts with important guidance in assessing the potential application of the GAAR where the policy rationale of a provision is readily apparent from its text.
Canada v. Cameco Corporation20
The Cameco case marked the first opportunity for the Federal Court of Appeal to consider Canada's transfer pricing 'recharacterisation' rule, which permits the CRA to substitute certain transactions or series of transactions between non-arm's-length persons with a notional transaction that would have been entered into by persons dealing at arm's length, under terms and conditions that would have been made by arm's-length persons. This extraordinary remedy is only available where it has been established that the transaction or series of transactions would not have been entered into between arm's-length persons and it can reasonably be considered to not have been entered into primarily for bona fide purposes other than to obtain a tax benefit.
The taxpayer, Cameco, is a large producer and supplier of uranium, which is bought and sold in an unregulated market under bilateral contracts but is not traded on a commodity exchange. The taxpayer had entered into long-term contracts with its European subsidiary for the purchase and sale of uranium based on fixed prices. Owing to ensuing market price increases, the subsidiary earned substantial profits.
The primary argument advanced by the Crown at the Federal Court of Appeal was that the taxpayer would not have entered into these contracts with an arm's-length person. The Court rejected this argument and held that the recharacterisation rule requires a determination of whether the transaction or series of transactions would have been entered into between arm's-length persons (an objective test based on hypothetical persons) – not whether the particular taxpayer would have entered into the transaction or series of transactions in issue with an arm's-length party (a subjective test). The Court noted that this rule only applies when no arm's-length persons would have entered into the transaction or the series of transactions in question, under any terms and conditions. If persons dealing at arm's length would have entered into the particular transaction or series of transactions in question, but on different terms and conditions, then Canada's more restrictive transfer pricing rule (which permits the terms and conditions of the parties' transaction or series of transactions to be adjusted, but does not permit it to be substituted for an entirely new transaction) would apply.
The Federal Court of Appeal's decision in Cameco is likely to be welcomed by many Canadian multinationals, as the Crown's argument that a subjective test ought to be applied under Canada's transfer pricing recharacterisation rule, if successful, could have resulted in considerable uncertainty where transactions are undertaken with foreign wholly owned subsidiaries. As the Court pointed out in its reasons, virtually any Canadian corporation carrying on business in a foreign country through a foreign subsidiary would likely satisfy the subjective test because it would clearly want to carry on business in that foreign country either on its own or through its own subsidiary, and thus would not sell its rights to carry on such business to an arm's-length party.
The Crown's application for leave to appeal to the Supreme Court of Canada was dismissed, leaving the Federal Court of Appeal's decision in Cameco as the final word on the transfer pricing recharacterisation rule for now.
Loblaw Financial Holdings Inc. v. Canada21
The decision of the Federal Court of Appeal in Loblaw concerned whether a Barbados subsidiary in the Loblaw group, Glenhuron Bank Limited (GBL), carried on an 'investment business' for the purposes of Canada's foreign affiliate rules. The Tax Court of Canada had concluded that it did, on which basis the income of GBL was FAPI, and was thus required to be included in the income of the Canadian parent corporation on an accrual basis. The case turned on the interpretation of the regulated foreign bank exception, which provides that a business carried on by a regulated foreign bank is not an investment business if certain conditions are met. While the narrow tax issues in Loblaw are only of historical relevance due to subsequent legislative changes to the regulated foreign bank exception, the fundamental issues relating to the interpretation of the scope and purpose of Canada's foreign affiliate regime could have far reaching consequences for Canadian multinationals.
GBL engaged in various financing activities, which were funded with a combination of capital received from members of the Loblaw group of companies and retained earnings. The sole question before the Federal Court of Appeal was whether the Tax Court of Canada had erred in concluding that GBL did not conduct business principally with arm's-length persons for the purposes of the investment business definition. The Tax Court had based its conclusion on the fact that GBL had received its financing from non-arm's-length persons. Because, in its view, the business activities of a bank extend to both the receipt and the use of funds, the non-arm's-length nature of these receipts should be taken into account. In addition, while substantially all the investments made by GBL were with arm's-length persons, the Tax Court framed GBL's activities in terms that suggested GBL was carrying on business for its parent company and not for its own account.
The Federal Court of Appeal rejected both of these positions. On the matter of the nature of a banking business, the Court held that there was no basis to conclude that the arm's-length test requires looking to both the receipt and the use of funds and that, on the particular facts at hand, the capital investments received from other Loblaw entities were not part of the business conducted by GBL. This conclusion is in line with the long-standing distinction between the capital that allows a person to conduct its business and the activities by which it earns its income. On the second point, the Federal Court of Appeal held that the Tax Court of Canada had failed to respect the distinction between a corporation and its shareholders when it determined that GBL was acting on behalf of its parent in the course of its business activities. While the parent may have provided direction and oversight, this did not mean that GBL carried on business either with or for its parent. The Court ultimately concluded that GBL carried on its business with arm's-length persons and therefore its income was not FAPI.
The Supreme Court of Canada has granted the Crown's application for leave to appeal and thus can be expected to weigh in on these fundamental issues regarding the relationship between a parent corporation and the business activities of its subsidiary, including the role of shareholder capital in such business activities. It will also be interesting to see whether the Crown seeks to argue the GAAR before the Supreme Court (the Tax Court of Canada rejected this argument in obiter dicta and the Crown did not appear to pursue it before the Federal Court of Appeal). If the Crown advances an argument based on the GAAR, we may have two decisions from Canada's highest court in 2021 involving one of the most challenging income tax provisions for taxpayers to apply in practice.
Outlook and conclusions
Canadian corporate tax rates have remained relatively low while income tax rates applicable to individuals have remained high by global standards.
Canada's economic recovery from the covid-19 pandemic is likely to shape the government's fiscal policy for some time. The federal government did not release a formal budget in 2020, but it stated in an economic update released in the fall of 2020 that it intends to spend a further C$70–100 billion to help Canada emerge from the economic consequences of the pandemic. It also signalled that investments in green energy will play a key role in its economic recovery plan. While the particulars of how the government intends to usher in this promised green recovery are still unknown, it has stated that it will cut the corporate tax rate in half for companies that create zero-emissions products. The government may also seek to expand existing tax incentives that are specifically designed to promote investment in green energy projects, such as the accelerated CCA rate for specified clean energy generation equipment, an immediate deduction for certain expenses incurred in the development of clean energy or 'green energy' generation projects, and the flow-through share mechanism by which principal-business corporations may renounce certain expenditures to their shareholders, allowing such shareholders to shelter other sources of income.
Canada's current federal government has demonstrated that it is motivated by a political desire to prevent high-income individuals from gaining an unfair tax advantage over the 'middle class.' For example, in its 2020 autumn economic update, the government implemented its 2019 budget proposal to limit the monetary value of stock option grants by 'mature' businesses that can be eligible for taxation at capital gains rates. Under the former rules, a deduction effectively provided for taxation of many employee stock options (regardless of employer size) at capital gains rates. Effective 1 July 2021, employees of large corporations will only be eligible to receive this deduction in respect of the first C$200,000 of options vesting in a given year.22 The new rules do not apply to options granted by CCPCs or by non-CCPCs whose annual gross revenue does not exceed C$500 million. These rules appear to specifically target executives of large Canadian corporations, whose compensation has traditionally included stock options and other forms of performance-based compensation.
In addition, Canada has introduced a number of legislative changes aimed at preserving the tax base in recent years. These changes include extending loss restriction rules to trusts, extending the thin capitalisation rules to trusts, partnerships and non-residents carrying on business in Canada, introducing the FAD rules targeting foreign-controlled Canadian corporations using corporate surplus or capital to make investments in foreign affiliates, strengthening the FAPI system and broadening the anti-avoidance measures in the thin capitalisation rules. A number of legislative changes were made to deny the benefits of transactions that sought to change the character of amounts recognised for tax purposes from income to capital gains and to further restrict the inter-corporate dividend deduction. The B2B rules were extended to royalty and rental arrangements, and a character conversion element was introduced where the B2B arrangement includes a combination of royalty payments and interest payments. For this purpose, royalty is broadly defined and may include payments for services. In addition to these changes, the ratification of the MLI may result in significant changes in the international tax landscape in the coming years.
Owing to the covid-19 pandemic, the 2020 federal budget was deferred indefinitely and was ultimately replaced with an economic update in autumn 2020 that was much narrower in scope. The government recently announced that its 2021 budget will also be delayed as Canada continues to deal with the pandemic. As a result, the current federal government has not released a formal budget since its re-election in 2019. In its re-election platform, the government proposed to limit the amount of interest that certain corporations can deduct and to limit the tax benefits of hybrid debt mismatch arrangements. Whether these proposals will be implemented remains to be seen.
1 Elie S Roth, Chris Anderson and Ryan Wolfe are members of the tax group at Davies Ward Phillips & Vineberg LLP.
2 KPMG Canadian corporate tax tables 2020 and 2021.
3 The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
4 One exception is real estate businesses, which are sometimes carried on by a commercial unitised trust that qualifies as a real estate investment trust (REIT).
5 Shares of a class may be issued in one or more series.
6 Alberta, British Columbia and Nova Scotia.
7 See Article IV(7) of the Canada-United States Income Tax Convention (1980). When applicable, these anti-hybrid rules deny treaty benefits on any amount received from, or derived through, the hybrid entity.
8 There are also special categories of losses not discussed herein, such as farming losses and allowable business investment losses. A distinction is also drawn between non-capital losses and property losses in certain circumstances.
9 This C$500,000 business limit will be reduced where the CCPC's investment income or taxable capital exceeds certain amounts.
10 Subject to certain anti-avoidance rules and a special refundable tax payable by private corporations or certain corporations controlled by an individual on otherwise deductible dividends (generally from portfolio investments). This tax is refunded when the private corporation itself pays dividends. Legislative changes in recent years have restricted the scope of dividends that can be received tax-free by the recipient corporation.
11 Technically, the ratio is based on a monthly average of the greatest amount of such debt outstanding in each month.
12 The average is based on contributed surplus and paid-up capital at the beginning of a calendar month.
13 A corporation formed on an amalgamation is generally considered a new corporation, subject to specific rules that deem it to be a continuation of one or more of the predecessor corporations. Canadian corporate law does not include the concept of a 'survivor' corporation resulting from an amalgamation.
14 An alternative benchmark period of January and February 2020 is available on an elective basis, in which case an employer's wage subsidy eligibility is determined using its average gross revenue for that period. A deeming rule also applies to cause an employer to automatically qualify for a wage subsidy if it qualified in the immediately preceding period.
15 Representing annualised wages C$58,700. The subsidy amount is scaled-up as an employer's gross revenue decline increases and the maximum subsidy is only available to employers that experienced a gross revenue decline of 70 per cent or greater.
16 Including, among others, rent, mortgage interest, property taxes, property insurance and utilities.
17 The 25 per cent top-up subsidy is included in the computation of the C$75,000 eligible expense limit per location, but is not included in the global limit of C$300,000 per applicant.
18 2020 FCA 43.
19 This exemption applies where a resident of Luxembourg owns 10 per cent or more of any class of shares of a Canadian corporation and disposes of shares of such Canadian corporation the value of which is derived principally from immovable property (other than rental property) in which the business of the corporation is carried on.
20 2020 FCA 112.
21 2020 FCA 79.
22 The C$200,000 limit is determined based on the fair market value of the options on the date that they are granted.