Annual International Bar Association Conference 2014 Tokyo, Japan
Recent Developments in International Taxation Canada
L. David Fox Fasken Martineau DuMoulin LLP [email protected]
Budget 2014 Highlights
In summary, from an international tax perspective, significant proposals contained in the Department of Finance (Canada) (“Finance”)’s 2014 Federal Budget (“Budget 2014”), included: (i) new captive insurance and offshore banking anti-avoidance rules in the foreign affiliate regime; (ii) disallowing backto-back arrangements that avoid the thin capitalization rules and Part XIII withholding tax on interest; (iii) providing updates and announcing further consultations on base erosion, a proposed domestic treaty shopping rule, exchanges on information between Canada and other countries and non-profit organizations. 1.1(a) Captive Insurance Budget 2014 proposes to expand an existing anti-avoidance rule in the foreign accrual property income (“FAPI”) provisions that prevents Canadian taxpayers from moving income from insuring Canadian risks to foreign affiliates in low tax jurisdictions.1 The proposed new rules target arrangements (sometimes referred to as “insurance swaps”) under which a foreign affiliate exchanges Canadian risks with a third party for foreign risks, but retains the economics of Canadian risks. Budget 2014 does this by deeming a foreign affiliate’s income from foreign risks to be FAPI where: (i) the foreign affiliate’s risk of loss or opportunity for profit on foreign risks can reasonably be considered to be determined by reference to the returns from other risks insured by other parties (“Tracked Risks”); and (ii) at least 10% of the Tracked Risks are Canadian risks. 1.1(b) Thin Capitalization Rules and Back-to-Back Loans The thin capitalization rules deny a portion of otherwise deductible interest paid or payable by a Canadian corporation or trust and non-resident corporation or trust that carries on business in Canada (including a non-resident partnership in which such a non-resident corporation or trust is a member) in respect of debts owing to “specified non-residents” to the extent that the debt to equity ratio of the corporation or trust in respect of the outstanding debts owing to the specified non-residents exceed 1.5 to 1. Interest, the deductibility of which is disallowed, is deemed to be a dividend for Canadian withholding tax purposes. The deemed dividend will arise even if the “interest” is not paid. Budget 2014 proposes to expand the existing thin capitalization back-to-back loan rules to cover secured and limited recourse arrangements. In simplified terms, a back-to-back loan will now exist where: (a)
a taxpayer has an interest-bearing obligation to a third party intermediary; and
a specified non-resident pledges property to the intermediary to secure the obligation, has limited recourse debt of the intermediary or makes a loan to the intermediary on condition that the intermediary makes a loan to the taxpayer.
In these circumstances, for thin capitalization purposes, the Canadian taxpayer will be deemed to be indebted to the specified non-resident and will be deemed to have paid interest directly to the specified non-resident. The taxpayer will be deemed for Canadian withholding purposes to have paid interest to the 1
Generally, the existing rule includes income from insurance Canadian risks in FAPI if 10% or more of the gross premium income (net of reinsurance ceded) relates to Canadian risks (i.e., risks in respect of persons resident in Canada, property situated in Canada, or businesses carried on in Canada).
3 specified non-resident if the back-to-back arrangement reduces the Canadian withholding tax on interest. Budget 2014 stated that a guarantee, in and of itself, will not be considered a pledge of property for the purposes of these rules. Concern has been expressed regarding the overly broad nature of these proposed amendments and it is understood that Finance is considering revisions to the proposed amendments to address inappropriate results which their application may produce. 1.1(c) Taxation of Immigration Trusts Certain rules in the Income Tax Act (Canada) (the “Act”) generally apply to deem certain trusts settled outside of Canada to be resident in Canada where there is a “resident contributor,” or a “resident beneficiary” (the “Non-Resident Trust Rules”). Trusts deemed resident in Canada under the NonResident Trust Rules will generally be subject to Canadian income tax in the same fashion as trusts settled in Canada. For several decades, non-residents of Canada have had the opportunity to establish a nonresident trust, informally known as an “immigration trust,” which was not subject to Canadian taxation on its foreign source income for a 60 month period. Moreover, the Non-Resident Trust Rules contained a specific exemption for “immigration trusts”. Budget 2014 proposes to remove the exemption for “immigration trusts” from the application of certain anti-avoidance rules. If the proposed amendments are passed, such trusts will now be taxed as Canadian resident trusts under the Non-Resident Trust Rules. These amendments will apply to most “immigration trusts” commencing in 2015. 1.2
The Non-Resident Trust Rules were amended such that they will apply to deem what would otherwise be a non-resident trust to be a Canadian resident trust where the non-resident trust holds property on conditions that grant effective ownership of the property to a Canadian resident taxpayer. Any transfer or loan of property (regardless of whether fair market value consideration is received for the transfer or loan) made by the Canadian resident taxpayer will be treated as a transfer or loan of property by a “resident beneficiary” and will generally result in the application of the Non-Resident Trust Rules and the inability to distribute property from the trust on a tax-deferred basis.2 1.3
Under the Act, in computing the income of a Canadian resident taxpayer, any amount received as a dividend on a share owned by the taxpayer of a non-resident corporation must be included in income. Generally speaking, under the foreign affiliate regime in the Act, this income inclusion may be offset by a deduction, where the non-resident corporation qualifies as a foreign affiliate of a Canadian resident corporation, the foreign affiliate is resident in a country with which Canada has a tax treaty and the dividend is paid from the foreign affiliate’s “exempt surplus” account. In The Queen v. Lehigh Cement Limited et al., 3 a Canadian resident corporation (“Canco”), which was part of a multi-national corporate group, borrowed funds from a financial institution and used those funds to invest in shares of a newly-formed Delaware limited liability corporation, which was a “foreign 2
The Act contains a provision (the “Attribution Rule”) which attributes income derived from trust property to a person resident in Canada where the property was received by the trust from the person and the property can revert to the person, pass to others determined by the person, or, during the lifetime of the person, the property cannot be disposed of except with the person’s consent, or in accordance with the person’s direction. Very generally, if the Attribution Rules apply, property cannot be distributed to beneficiaries (other than the person who contributed the property or a spouse) on a tax-deferred basis. 3 The Queen v. Lehigh Cement Limited et al., 2014 FCA 103 (F.C.A.).
4 affiliate” of Canco.4 The foreign affiliate, in turn, made an interest-bearing loan to a United States (“US”) sister company (“SisterCo”) of Canco. Some of the loaned proceeds were then used, indirectly, to redeem preferred shares which Canco held in SisterCo’s parent company. SisterCo paid interest to the Canco’s foreign affiliate, which then paid the interest it received to Canco as dividends. Under the Act, Canco included the dividends from the foreign affiliate in income, but then also claimed a deduction for the dividends as such dividends were paid from the foreign affiliate’s “exempt surplus” account. In computing its income for Canadian income tax purposes, Canco also claimed a deduction for the interest which it paid on its loan from the financial institution. The Minister of National Revenue (the “Minister”) reassessed Canco to deny the dividend deduction by Canco based on an anti-avoidance rule (subsection 95(6) of the Act) which provides, in part, that where the principal purpose for the acquisition of shares of a corporation (i.e., in this case, the foreign affiliate) is to avoid, reduce or defer the payment of tax, the acquisition of the shares is deemed not to have taken place. The Federal Court of Appeal found in favour of Canco on the basis that the relevant anti-avoidance provision was aimed at taxpayers whose principal purpose for acquiring or disposing of shares in a nonresident corporation is to meet or fail the relevant tests for “foreign affiliate,” “controlled foreign affiliate”5 or related-corporation status, with a view to avoiding, reducing or deferring Canadian tax. In Lehigh Cement, the court found that the principal purpose of the acquisition or disposition of shares in the non-resident corporation must be determined on the basis of all relevant circumstances and that the Canada Revenue Agency (the “CRA”) could not simply look at an entire series of transactions to discern a tax avoidance purpose because that is not the specific target of the relevant anti-avoidance provision. The Federal Court of Appeal found that manipulating the shareholdings to change its status does not necessarily trigger the antic-avoidance rule. The purpose must be dominant, not just one of many different purposes. The principal purpose of Canco’s acquisition of shares in the foreign affiliate, examining the entire series of transaction, was to achieve overall US tax savings. Canadian tax savings could have been obtained without acquiring the shares of the foreign affiliate and the acquisition of shares of the foreign affiliate did not result in an avoidance of Canadian tax. 1.4
McKesson Canada—Transfer Pricing
There were two matters at issue in the Tax Court of Canada’s decision in McKesson Canada Corporation v. The Queen.6 The first involved a transfer pricing adjustment made by the Minister in respect of the sale, pursuant to a Receivables Sales Agreement (the “RSA”), in 2003 by McKesson Canada Corporation (“McKesson Canada”) of all of its outstanding receivables (approximately $460 million), as well as all of its eligible receivables daily as they arose over a five year period, to its Luxembourg parent company (“MIH”). The second issue involved McKesson Canada’s liability for Canadian tax which it failed to withhold from the dividend McKesson Canada was deemed to have been paid to MIH as a result of the transfer pricing adjustment. The Tax Court of Canada’s decision in McKesson was voluminous and is currently under appeal. In summary, pursuant to the RSA, McKesson Canada sold its receivables to MIH, at a discount of 2.206%. The core of this transfer pricing dispute related to the calculation of this discount rate. At the time of sale, McKesson Canada’s credit department collected approximately 99.96% of its receivables, on 4
Pursuant to the Act, a “foreign affiliate,” at any time, of a taxpayer resident in Canada is a non-resident corporation in which, at that time, the taxpayer’s equity percentage is not less than 1% and the total of the equity percentages in the corporation of the taxpayer and of each person related to the taxpayer is not less than 10%. 5 Very generally, a “controlled foreign affiliate,” at any time, of a taxpayer resident in Canada includes a foreign affiliate of the taxpayer that is, at that time, controlled by the taxpayer. 6 2013 TCC 404 (T.C.C.), currently under appeal to the Federal Court of Appeal [hereinafter McKesson].
5 average, within a roughly 30 day period. Pursuant to a “Servicing Agreement,” MIH paid McKesson Canada to continue to service its receivables for a fee of $9.6 million annually, regardless of the amount outstanding.7 The 2.206% discount on the sale of McKesson Canada’s receivables had a significant impact on the company’s financial results--in the year of the sale of the receivables, McKesson Canada ceased to be profitable and reported a tax loss. At the time of the RSA, McKesson Canada’s outside counsel obtained a report from a large Canadian advisory and capital markets firm that provided an opinion on certain aspects of the terms and conditions of the RSA and of certain components of the discount calculation and their comparability to arm’s length terms and conditions in similar circumstances (the “Report”). The Report was ultimately relied upon by McKesson Canada as the only form of contemporaneous documentation supporting its transfer pricing position in respect of the sale of its receivables to MIH. The Minister reassessed McKesson Canada on the basis that if the RSA had been entered into between arm’s length parties, a discount rate of 1.013% would have been applied. Pursuant to the reassessment, McKesson Canada was assessed for a transfer pricing adjustment in the amount of $26.6 million and assessed for withholding tax (at a rate of 5% under the Canada-Luxembourg Tax Treaty) which it had been required to withhold and remit on the dividend which it was deemed to have paid to MIH in the amount of the transfer pricing adjustment. 8 Several transfer pricing reports were presented to the court. McKesson Canada relied not only on the Report, but three other expert reports. The Minister also relied on three transfer pricing expert reports, which reports focused on the appropriate transfer pricing methodologies in the circumstances and the appropriate discount rate to reflect arm’s length prices for the sale of the receivables. The Tax Court of Canada ruled that the task for the court was to determine whether the terms and conditions of the transactions, carried out by the parties, resulted in a purchase price for the McKesson Canada receivables that was within the range of what arm’s length parties would have agreed to. The court then examined in detail the computation of the discount rates in the various expert reports.9 The Tax Court of Canada considered, but did not accept, the conclusions of any of the experts called to testify in their entirety. The court determined that the appropriate discount rate, taking into account the arm’s length principle, was between 0.959% and 1.17%. The Tax Court of Canada accepted the Minister’s discount rate of 1.013% as it was within the range which the court found to be reasonable and because to use a discount rate toward the higher end of this range would encourage taxpayers to use the courts to lower transfer pricing adjustments which the Minister had assessed. The Tax Court of Canada decision contained a very direct critique of the Report and its underlying assumptions, but also highlighted concerns and inconsistencies in all of the expert evidence introduced by the parties at trial. With respect to the withholding tax assessment, McKesson Canada argued that Minister was statutebarred in its reassessment, based on the five year limitation period under the Canada-Luxembourg Tax Treaty. The Tax Court of Canada rejected this argument on the basis that the reassessment was not a change by Canada in McKesson Canada’s income and was not an attempt by Canada to add a transfer 7
The amount paid under the Servicing Agreement was not challenged by the Minister. Pursuant to subsection 215(6) of the Act, where a person has failed to deduct or withhold any amount as required by section 215 from an amount paid or credited to a non-resident person, that person is liable to pay as tax on behalf of the non-resident person the whole of the amount that should have been deducted or withheld. 9 The Tax Court of Canada stated that if the 2.206% discount rate applied on the sale of the receivables under the RSA was restated as an interest rate on a financing by McKesson Canada, the annual interest rate paid by McKesson Canada would be 27%. Even the 1.013% discount rate used by the Minister in the reassessment resulted in an annual effective financing cost in the range of 12%-13% (more than double the annual interest rate payable by McKesson Canada on available credit lines). 8
6 pricing adjustment to MIH’s income. That is, Article 9(3) of the Canada-Luxembourg Tax Treaty only deals with Article 9(1) of the treaty (in respect of transfer pricing adjustments and not deemed dividends) and there was no evidence that MIH was subject to any “extra tax” in Luxembourg because of the deemed dividend. As such, the five year limitation period in Article 9(3) of the Canada-Luxembourg Tax Treaty did not apply.10 Key takeaways from this decision are the importance of the preparation of quality expert reports for transfer pricing purposes. In McKesson, the Tax Court of Canada found that there were “unsupported assumptions” which were illogical in McKesson Canada’s expert reports. Also critical are the use of appropriate comparable transactions and the selection of appropriate experts. While McKesson Canada argued that the receivables sale was not a securitization transaction and that the company had no financial or business reason to be interested in engaging in such a transaction, the author of the Report was principally experienced with arranging Canadian trade receivables securitization transactions. This fact, combined with the Report’s conclusions based on securitization comparables, undermined McKesson Canada’s position and led the Tax Court of Canada to question whether the Report was sufficient to meet the contemporaneous documentation requirements in the Act to avoid the imposition of transfer pricing penalties. Another take away from McKesson is that the presence of numerous experts and expert witness with different perspectives and backgrounds may not persuade a court that the transfer pricing range used in a particular circumstance is appropriate. Fundamentally, the views of experts will not supplant the Tax Court of Canada’s role as the final arbiter of issues. Finally, McKesson Canada played a relatively insignificant role in the planning and structuring of the RSA and no one from McKesson Canada testified during the hearing, despite the fact that the company had a large finance and credit department of its own. The main witness for McKesson Canada was from McKesson US and he testified that he had planned the entire transaction with minimal input from the executive team at McKesson Canada. One would expect that McKesson Canada’s limited role in structuring, planning and implementing this transaction did not help its case. As such, another lesson from this decision for multi-national organizations with Canadian members would be that, as much as possible, Canadian personnel should be involved in and understand any proposed transaction involving the Canadian business in order to, at the very least, provide a perception of greater commerciality from the Canadian business’s perspective. 1.5 Canada Revenue Agency Issues New Transfer Pricing Memorandum on Contemporaneous Documentation On March 28, 2014, the CRA released new guidance regarding the application of Canadian transfer pricing rules and, specifically, CRA requests for contemporaneous documentation. In summary, Transfer Pricing Memorandum 5 stipulates that auditors must issue requests for contemporaneous documentation by letter on the initial contact with the relevant taxpayer and that separate requests must be issued to each taxpayer for each year under audit. Where a taxpayer has notified Competent Authorities of its intention to proceed with an Advance Pricing Arrangement, CRA auditors must contact Competent Authorities before issuing a request for contemporaneous documentation. The CRA will not issue requests for contemporaneous documentation where a particular transaction at issue is covered by an Advance Pricing Arrangement. Transfer Pricing Memorandum 5 stipulates that auditors must now accept and review documentation provided by a taxpayer after the standard three month deadline for providing such documentation (the auditor no longer has discretion in the matter). The transfer pricing penalty provision in the Act is clarified as being a compliance penalty based solely on the determination of whether 10
Though the issue was not raised at trial, based on the Tax Court of Canada’s decision, it appears that the limitation period under the Canada-Luxembourg Tax Treaty would have applied to the $26,610,000 transfer pricing adjustment.
7 reasonable efforts were made by the taxpayer to determine an arm’s length price (i.e., by making or obtaining contemporaneous documentation in a timely fashion as provided under the Act) and ought not consider the accuracy of transfer price itself. Taxpayers may establish that they have made reasonable efforts to determine and use arms’ length transfer prices by choosing to provide the exhaustive list of documents stipulated by the Pacific Association of Tax Administrators in 2003. 1.6
Offshore Tax Informant Program Launched
The CRA’s Offshore Tax Informant Program was launched in January 2014. This program provides cash rewards to individuals that provide information regarding international tax non-compliance to the CRA that results in the collection of outstanding taxes. In order to qualify for the program, the federal tax collected must result in assessments or reassessments of federal tax exceeding $100,000. Payments to the informant will be up to 15% of the federal income tax collected. The informant must not have been involved in the reported international tax non-compliance. 1.7
Foreign Property Reporting
Canadian taxpayers holding certain foreign property (including, among other things, funds or intangible property situated or deposited outside Canada, tangible property situated outside Canada, shares of the capital stock of non-resident corporations and interests in non-resident trusts) the cost amount of which exceeds $100,000 are required, on an annual basis, to complete and file a detailed form (Form T1135) with the CRA listing such property and details in respect thereof. Information which must now be reported in respect of each foreign property includes: (i) the name of the specific foreign institution or other entity holding funds outside of Canada; (ii) the specific country to which the property relates; and (iii) the foreign income generated from the property. Penalties for failing to file Form T1135 can be substantial and the normal reassessment period during which a Canadian taxpayer may be assessed by the Minister has been extended from three years to six year if the taxpayer fails to report income from foreign property when required to do so in his/her income tax return and Form T1135 is not filed, is not filed on time, or is inaccurately filed. 1.8
Treaty and Tax Information Exchange Agreement Developments
Since October 2013, tax treaties between Canada and Hong Kong,11 Poland12 and Serbia13 have entered into force. In addition, several Protocols amending or regarding the interpretation of the Exchange of Information provisions of Canada’s tax treaties also entered into force or were agreed upon.14 As a general statement, 11
October 29, 2013. October 30, 2013. 13 October 31, 2013. 14 The Second Protocol amending the Convention between Canada and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital entered into force on October 1, 2013. On November 1, 2013, the agreement between Canada and Switzerland concerning the interpretation of Article 25 (Exchange of Information) of the Convention between the Swiss Federal Council and the Government of Canada for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital entered into force. On December 10, 2013, the Protocol amending Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital entered into force. On December 27, 2013, the Protocol amending the Convention between the Government of Canada and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the “Canada-France Tax Treaty”) entered into force. It should 12
8 the aim of such Protocols or agreements regarding interpretation is to ensure that the Exchange of Information provisions of such treaties are consistent with the standard developed by the Organization for Economic Co-operation and Development (“OECD”) for the exchange of tax information. The Protocol amending the Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the “Canada-Barbados Tax Treaty”) entered into force on December 17, 2013. This Protocol not only conformed the Exchange of Information provision of the treaty to the OECD standard, but also contained substantive amendments to the Canada-Barbados Tax Treaty.15 Tax Information Exchange Agreements between Canada and Lichtenstein, the British Virgin Islands, Panama and Bahrain entered into force. Agreements between Canada and Brunei and Uruguay have been signed, but have not yet entered into force. Tax Information Exchange Agreements between Canada and Antigua and Barbuda, Belize, Cook Islands, Gibraltar, Grenada, Liberia, Montserrat and Vanuatu are currently under negotiation. 1.9
Ratification of Convention on Mutual Administrative Assistance in Tax Matters
On November 21, 2013, the Government of Canada ratified the Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”). The purpose of the Convention, developed jointly with the OECD and the Council of Europe, is to improve international tax co-operation between the tax authorities of countries that are a parties to the Convention, with a view to combatting international tax avoidance and evasion. Canada will exchange tax information, pursuant to the OECD standard with other parties to the Convention. In Canada, the Convention will apply to Canadian taxes that fall under the Act, the Excise Tax Act, and the Excise Tax Act, 2001. However, pursuant to reservations under the Convention, Canada will not be obligated to collect taxes on behalf of another country, or provide assistance in the service of related documents. Instead, Canada will continue to negotiate a provision on assistance in the collection of taxes on a bilateral basis and agreed to include such a provision in certain of its bilateral tax treaties. The Convention entered into force in Canada on March 1, 2014. 2.
2.1 Intergovernmental Agreement between Canada and the United States of America to Implement the Foreign Account Tax Compliance Act On February 5, 2014, Canada and the US signed an Intergovernmental Agreement (“IGA”) to implement the Foreign Account Tax Compliance Act (“FATCA”). Broadly speaking, pursuant to FATCA, non-US financial institutions are required to enter into an agreement with the US Internal Revenue Service (the “IRS”) to report to the IRS accounts held by US residents and US citizens (which, in the case of Canada, would include US citizens who are residents or citizens of Canada). If the non-US financial institutions are non-compliant with FATCA, FATCA requires US payors making certain payments of US-source income to the non-compliant financial institution to withhold a tax equal to 30% of the payment. The 30% FATCA withholding tax can also be levied in respect of a compliant non-US financial institution, on individual accountholders that fail to provide documentation as to whether they are US residents or US be noted that this Protocol extends the coverage of extends the territorial coverage of the Canada-France Tax Treaty to New Caledonia, a French territory in the southwest Pacific. The Protocol amending the Convention between the Government of Canada and the Government of the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital was signed on April 1, 2014 (but is not yet in force). 15 A report regarding the amendments to the Canada-Barbados Tax Treaty is contained in the “Recent Developments in International Taxation—Canada” Report from the Annual International Bar Association Conference 2013—Boston.
9 citizens and on passive entities that fail to identify their substantial US owners. In some circumstances, FATCA can require financial institutions to close the accounts of certain clients. Very generally, pursuant to the IGA: (a)
Canadian financial institutions will not report any information directly to the IRS. Instead, accountholder information on US residents and US citizens will be reported to the CRA which will transfer the information to the IRS under the authority of the existing provisions of (and protected by the confidentiality safeguards under) the Canada-United States Tax Convention (1980) (the “Treaty”).
The 30% FATCA withholding tax will not apply to clients of Canadian financial institutions and can apply to a Canadian financial institution only if the financial institution is in significant and long-term non-compliance with its obligations under the IGA.
The FATCA requirement that Canadian financial institutions be required to close accounts or refuse to offer services to clients in certain circumstances will be eliminated.
A number of accounts will be exempt from FATCA reporting, including Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Disability Savings Plans and Tax-Free Savings Accounts.
Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from reporting.
The IRS will provide the CRA with enhanced and increased information on certain accounts of Canadian residents held at US financial institutions.
Under the IGA, Canadian financial institutions will be required to begin due diligence procedures, to identify whether an account will be a “US Reportable Account,” commencing July 1, 2014 and to report information to the CRA beginning in 2015. The first exchange of information between the CRA and the IRS will occur in 2015. Legislation proposing to implement the IGA and related amendments to the Act (including penalties for non-compliance) has been released and will likely be passed in the near term.16 2.2
International Electronic Funds Transfers
Legislation amending the Act to implement proposals regarding international electronic funds transfers has been tabled and will likely be passed in the near term. Under the proposed amendments, certain financial intermediaries will be required to report to the CRA, within five working days of the transfer, electronic funds transfers in excess of $10,000. Penalties may be imposed for failing to report such transfers as and when required. 2.3
In Budget 2014, Finance highlighted Canada’s participation in the OECD’s “base erosion and profit shifting” (“BEPS”) project. Budget 2014 confirmed that Canada remained involved in working with other governments in resolving the issues addressed in the BEPS Action Plan, released by the OECD in July 2013. 16
The IGA will be implemented pursuant to the proposed Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act, as well as proposed amendments and additions to the Act.
10 In order to assist Finance in establishing priorities and to guide Canada’s participation in international dialogue, Finance invited input from stakeholders on the following questions:
What are the impacts of international tax planning by multi-national enterprises on other participants in the Canadian economy?
Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by Finance?
Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to Finance?
What considerations should guide Finance in determining the appropriate approach to take in responding to the issues identified—either in general or with respect to particular issues?
Would concerns about maintaining Canada’s competitive tax system by alleviated by coordinated multilateral implementation of base protection measures?
What actions should Finance take to ensure the effective collection of sales tax on ecommerce sales to residents of Canadian by foreign based vendors?
Proposed Domestic Treaty Shopping Rule
Following up on the identification by Finance in the 2013 Federal Budget of treaty shopping as an important issue, the release by Finance of a consultation paper on this topic in August 2013 in which Finance sought comments on alternative approaches that could be adopted by Finance to combat perceived abusive treaty shopping and the invitation of submissions by stakeholders regarding the alternative approaches, not surprisingly, Finance determined that it preferred the approach of adopting a general domestic rule to prevent treaty shopping. In Budget 2014, Finance sought comments on a proposed domestic rule to prevent treaty shopping. To facilitate the feedback from stakeholders, the main elements of such a rule will include the following provisions: (a)
Main Purpose Provision—Subject to the relieving provision, treaty benefits would be denied if it is reasonable to conclude that one of the main purposes for undertaking the transaction was to obtain the treaty benefit.
Conduit Provision—In the absence of contrary proof, there would be a presumption that one of the main purposes for undertaking a transaction that results in a treaty benefit was to obtain the benefit if the relevant treaty income is primarily used to pay, distribute or otherwise transfer, directly or indirectly, an amount to another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly.
Safe Harbour Presumption—Subject to the conduit presumption, there would be a presumption, in the absence of contrary proof, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if:
the person (or a related person) carries on an active business in the state with which Canada has concluded the tax treaty, and where the relevant treaty income is derived from a related person in Canada, the active business is substantial in comparison to Canadian activity;
the person is not controlled, directly or indirectly in any manner whatever, by another person that would not have been entitled to an equivalent or more favourable tax benefit had the other person or persons received the relevant treaty income directly; or
the person is a corporation or trust, the share or units of which are regularly traded on a recognized stock exchange.
Relieving Provision—Even if the main purpose provision applies, a relieving provision allows the benefit to be provided, in whole or in part, to the extent that it is reasonable having regard to all the circumstances.
If adopted, Finance indicated that the proposed treaty shopping rules could be included in the Income Tax Conventions Interpretations Act (Canada), thus applying the rule to all of Canada’s tax treaties on enactment. 2.5
Cameco Corporation v. R.
This case concerns the establishment by Cameco Corporation (“Cameco”) of an offshore marketing subsidiary in Switzerland, the entering into of a long-term intercompany agreement between Cameco and the subsidiary for the supply by Cameco to the subsidiary of uranium produced in Canada (at prices reflecting the uranium markets at the time the agreement was entered into) for ultimate sale by the subsidiary to third parties (the majority of Cameco’s customers are located outside Canada) and the transfer price arrangements in respect thereof. The Minister has reassessed Cameco for several years based both on the recharacterization provisions of the transfer pricing rules and the transfer prices in respect of the sale of uranium by Cameco to the subsidiary. For the years 2003- 2008, the Minister issued notices of reassessment for approximately $2.0 billion of additional income for Canadian tax purposes.17 Cameco has recorded a cumulative tax provision of $73 million, where it believes that an argument could be made that its transfer price may have fallen outside of an appropriate range of pricing in uranium contracts for the period from 2003-2013.18 The case is expected to go to trial in the Tax Court of Canada in 2015.
Cameco Corporation 2013 Annual Report-http://www.cameco.com/investors/financial_information/annual_reports/2013/ 18 Ibid.