Canada: Tax

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Canada.

It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.

This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/

  1. How often is tax law amended and what are the processes for such amendments?

    The annual federal budget is the major means of introducing new tax policy measures. Federal income tax legislation is drafted by the Tax Legislation Division of the Tax Policy Branch of the federal Department of Finance. The legislation is usually released in draft form and, accompanied by explanatory notes, made available to the public for comment and consultation before it is finalized. The government may, after the end of the consultation process, amend the legislation before finalizing, but it is not obliged to do so.

    Once finalized, the legislation is ordinarily tabled in Parliament by the Minister of Finance. The legislation must be passed by both the House of Commons and the Senate and receive Royal Assent from the Governor General before it becomes law.

  2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?

    Canadian-resident taxpayers, including individuals, corporations and trusts, are required to file income tax returns each year. Non-residents may also be required to file tax returns in Canada if they are employed or carry on business in Canada or dispose of certain types of Canadian property.

    Most individuals are obliged to file tax return for the year by April 30 of the following year; the deadline for self-employed individuals and their spouses is June 15, but the interest on any balance of taxes owing for the year (after instalment payments) begins to accrue after April 30. For corporations, income tax returns must be filed within six months after the end of each fiscal year.

    Taxpayers are generally required to maintain all books and records necessary to calculate and verify their taxes payable (and any other amounts required to be deducted, withheld or collected), for six years after the end of the tax year to which the records relate. In practice, this means that tax records may have to be kept for much longer than six years; a tax return may contain information that can only be verified with much older records.

    Taxpayers typically bear the onus of proving that their tax returns are correct, and failure to maintain relevant records may result in the denial of their filing position. Records are generally required to be kept at the taxpayer’s place of business or residence in Canada, and most records may be retained in electronic form.

  3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?

    The Canada Revenue Agency, known as the “CRA,” administers tax law for the federal government as well as most provinces and territories. It is also responsible for registering and overseeing the activities of charities in Canada. The CRA ‘s audit and collection functions are typically performed by CRA personnel working at one of 51 tax services offices located throughout the country, and most processing is done by one of five tax centres. Ultimate responsibility for the CRA and its administration lies with the Minister of National Revenue, a member of the Prime Minister’s Cabinet.

    The CRA maintains a toll-free telephone service to answer both general tax queries and address taxpayer-specific issues, and is increasingly focusing its efforts on making information more user-friendly and accessible, particularly through the Government of Canada website. Taxpayers can access most of their tax data through a secure portal on the website, and the CRA encourages (and sometimes requires) filings and other documents to be submitted through the portal.

    Standard issues are typically resolved at the audit stage, through discussions and meetings with the auditor responsible for the file; auditors’ assessment proposals must be approved by their Team Leaders before being finalized. Taxpayers who disagree with a tax assessment may file an objection and have the matter reconsidered by the CRA’s internal appeals division, and the remaining issues are often resolved at that stage. However, there is often a significant delay (3 - 9 months) between the time an objection is filed and the time it is reviewed by the appeals division.

    The length of time required to resolve tax issues varies significantly, depending on the complexity of the issues and the amounts at issue. Most tax issues, whether standard or complex, are resolved without the need for the taxpayer to initiate court proceedings, but the process can easily take a year or more, particularly in complex or contentious matters.

  4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?

    A taxpayer who disputes an assessment of tax and cannot resolve the matter at the audit or objection stage will generally have the right to file an appeal in the Tax Court of Canada. The Tax Court operates independently of the CRA and has exclusive jurisdiction to determine appeals on matters arising under certain federal legislation, including the Income Tax Act, the provisions of the Customs Act pertaining to customs duties and taxes, and the provisions of the Excise Tax Act that pertain to the federal goods and services tax. In each tax appeal the position of the Minister of National Revenue is represented by a lawyer employed by the federal Department of Justice.

    Appeals involving relatively small amounts of tax may be resolved on an expedited basis under the Tax Court’s Informal Procedure rules. In non-Informal Procedure cases, where an appeal has not been set down for a hearing or terminated within four months after the close of pleadings, the Court will require the parties to submit for its approval a proposed schedule for completion of the remaining steps in the appeal. Tax appeals may be heard within 12 - 18 months after being initiated but complex cases or cases requiring a hearing of more than one week may take much longer. However, the vast majority of cases are settled prior to a hearing; the decision to settle on behalf of the Minister of National Revenue is taken jointly by the Department of Justice and the CRA.

    Parties have the right to appeal decisions of the Tax Court to the Federal Court of Appeal, and in turn, but only with leave, to the Supreme Court of Canada.

    Taxpayers who wish to challenge the correctness or reasonableness of a discretionary decision made by the Minister of National Revenue may seek relief by making an application to the Federal Court for judicial review of that decision. The Federal Court also has exclusive jurisdiction to grant certain types of relief against the Minister, including the issuance of an injunction, writs of certiorari, prohibition, mandamus and quo warranto and declaratory relief. However, the Federal Court, almost without exception, declines to hear cases involving challenges to tax assessments.

  5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?

    Individuals who have a balance owing for a taxation year must pay on their taxes in full or before April 30 of the following year in order to avoid incurring interest charges. Self-employed individuals are usually required to make pre-determined instalment payments each quarter, by the 15th of each of March, June, September and December (or, if the due date falls on a weekend or public holiday, the next business day), and any remaining balance must be paid by April 30 of the following year. Corporations are usually required to pay their taxes in quarterly or monthly instalments, and any balance owing after payment of the instalments must be paid within two or three months after the end of the fiscal year.

    When a taxpayer disputes an assessment of tax, either by filing an objection or by initiating an appeal in the Tax Court of Canada, the CRA is usually barred from collecting the tax until the matter is resolved. However, where an objection is filed by a “large corporation,” as defined by the Income Tax Act, 50% of the amount in dispute is collectible while the dispute remains unresolved. (A corporation is classified as a “large corporation” for the year if, at the end of the year, the total taxable capital employed in Canada by it and its related corporations exceeds $10 million.)

    Collection also is not suspended where the dispute pertains to the federal goods and services tax, as well as taxes that the CRA alleges should have been withheld at source from employees or non-residents. In addition, collection may proceed in certain rare cases where the CRA is able to establish that its ability to collect the disputed tax - if the assessment were upheld - would be jeopardized by the delay.

  6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?

    The CRA is obliged by statute to safeguard the confidentiality of taxpayers’ information, and it has robust internal screening and security measures in place to ensure that this information is not disclosed to third parties without the taxpayers’ written consent. To supplement these measures, the CRA also provides tips to the public on how to avoid identity theft and how to identify fraudulent communications from third parties purporting to be acting on behalf of the CRA.

    However, the CRA is permitted to disclose taxpayer information in certain limited circumstances provided in the Income Tax Act, including for purposes of investigating whether a criminal offence has been committed.

    In addition, the CRA is not immune to system failures; it periodically issues notifications to the public announcing material privacy breaches, which are frequently attributable to employee error / misconduct or cyber-attacks. Information about unreported data breaches has been obtained by various media outlets through requests filed under the federal Access to Information Act.

  7. Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?

    The Common Reporting Standard was implemented in Canada effective July 1, 2017. Canada does not presently maintain a public Register of beneficial ownership.

  8. What are the tests for residence of the main business structures (including transparent entities)?

    Corporations that are incorporated under Canadian law are deemed by statute to be residents of Canada. In addition, under common law rules, a corporation that is not incorporated under Canadian law is resident in Canada if its central management and control is in Canada. This is generally considered to occur where the corporation’s board of directors exercises its responsibilities. However, where a shareholder effectively exercises control rather than the Board, the corporation will be considered to be resident where the shareholder resides. A similar central management and control test applies to trusts and their trustees.

  9. Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?

    The CRA has over the last 15 years devoted significantly greater internal resources to transfer pricing audits, which are initiated virtually as a matter of course when the CRA becomes aware of non-arm’s length transactions involving non-residents. The CRA is increasingly aggressive in challenging intercompany transactions, with a particular focus on inbound and outbound royalty payments and inventory transfers, transfers of technology to low-tax jurisdictions, and the payment of management and guarantee fees by Canadian taxpayers. Transfer pricing penalties assessed by the CRA have increased dramatically in the last 5 years.

    In 2016 Canada became a signatory to the Multilateral Competent Authority Agreement to implement the OECD’s transfer-pricing documentation requirements and country-by-country reporting. Consistent with the OECD recommendations, the Income Tax Act now requires country-by-country reporting for multinational enterprises with annual revenues exceeding €750 million in the preceding taxation year.

  10. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    Canada has CFC, Thin Cap and, as noted above, Transfer Pricing regimes in place.

    The Canadian CFC regime requires that Canadian residents include their share of the passive income (including capital gains) of a controlled foreign affiliate in income on an accrual basis. This is referred to as “foreign accrual property income” or FAPI. The intention of the FAPI rules is to eliminate any tax advantage from earning passive income through a foreign entity. The FAPI rules are notoriously complex and contain numerous deeming provisions and exclusions.

    The thin capitalization rules impose a debt to equity ratio of 3:2. The rules will disallow a deduction for any interest payments on the excess amount of debt. Further, this excess interest will be deemed to be a dividend for Canadian withholding tax purposes. Back to back loan rules are in place to prevent the avoidance of the thin capitalization rules through the use of an intermediary lender.

    Canada’s transfer pricing regime generally follows the OECD transfer pricing guidelines (although they are not incorporated into law by statute). It is possible to obtain an advance pricing agreement.

  11. Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?

    A GAAR was incorporated into the Income Tax Act in 1988 with the stated intention of curbing abusive tax avoidance transactions and preserving the fairness of the Canadian tax system.

    In general terms, the GAAR provides that if a transaction results in a tax benefit (including the reduction, avoidance or deferral of taxes), and the primary purpose of the transaction was to obtain the benefit, and if the transaction results directly or indirectly in a misuse or abuse of the provisions of the legislation, the transaction itself may be invalidated. The CRA has since applied the GAAR to a wide variety of transactions and the issue has been heavily litigated, with most cases turning on the question of whether there is a “misuse or abuse.” The CRA has also increasingly resorted to the GAAR to establish a secondary basis for assessing.

    Where a CRA auditor proposes to issue an assessment based on the GAAR, the file must first be reviewed by the CRA’s Abusive Tax Avoidance and Technical Support Division. The Division may then decide to refer the matter to the CRA’s GAAR Committee, comprised of representatives of the CRA, the Department of Finance and the Department of Justice, for its recommendation as to the GAAR’s application. As of late 2016, the Committee had reviewed more than 1300 cases and determined that the GAAR applied in approximately 80% of them.

  12. Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?

    Canada is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. To date, Canada has only agreed to adopt the minimum standards relating to anti-treaty shopping (BEPS Action 6) and the optional provision related to binding arbitration (BEPS Action 14). With respect to treaty shopping, Canada has confirmed that it will adopt the principal purpose test rather than the comprehensive limitation of benefits rule. However, it has indicated that it plans to negotiate LOB provisions in new tax treaties, to the extent possible.

    Canada has also enacted country-by-country reporting (BEPS Action 13).

    In addition, Canada has indicated that it will follow the revised OECD transfer pricing guidelines (BEPS Actions 8-10).

  13. How will BEPS impact on the government’s tax policies?

    BEPS is not likely to have a significant impact on Canadian tax policies, as its tax system already addresses most of the concerns raised by BEPS. The BEPS initiative coincides with a period in which the Canadian government has been placing a greater focus on the international tax system, including devoting greater resources to international tax audits and tweaking its domestic tax legislation to address aggressive international tax planning strategies by taxpayers. These legislative changes include the introduction of foreign tax credit generator rules, foreign affiliate dumping rules and tightening the thin capitalization rules. These changes occurred independently of the BEPS initiative. Further, the Canadian government had introduced an anti-treaty shopping rule to its domestic tax legislation. However, this proposal was abandoned in favour of participating in the BEPS initiative on treaty shopping.

  14. Does the tax system broadly follow the recognised OECD Model?

    Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.

    If so, what are the current rates and are they flat or graduated?

    Individuals are taxed at graduated rates. The rates and income thresholds vary depending on the province of residence. The 2017 income tax rates on regular income for an individual residing in the province of Ontario are as follows.

    Taxable Income

    Rate

    first $42,201

    20.05%

    over $42,201 up to $45,916

    24.15%

    over $45,916 up to $74,313

    29.65%

    over $74,313 up to $84,404

    31.48%

    over $84,404 up to $87,559

    33.89%

    over $87,559 up to $91,831

    37.91%

    over $91,831 up to $142,353

    43.41%

    over $142,353 up to $150,000

    46.41%

    over $150,000 up to $202,800

    47.97%

    over $202,800 up to $220,000

    51.97%

    over $220,000

    53.53%

    a) business profits
    Corporations are subject to federal and provincial income tax on their business profits. The rates depend on whether the general corporate rate, manufacturing & processing rate or small business rate applies. The small business rate is only available to Canadian-controlled private corporations on up to $500,000 of active business income earned in Canada. The following table sets out the combined federal and provincial rates for 2017.

    Province

    General Rate

    Small Business Rate up to $500,000

    M&P Income

    British Columbia

    26.0%

    12.5%

    26.0%

    Alberta

    27.0%

    12.5%

    27.0%

    Saskatchewan

    26.5%

    12.5%

    24.5%

    Manitoba

    27.0%

    10.5%

    27.0%

    Ontario

    26.5%

    15.0%

    25.0%

    Quebec

    26.8%

    18.5%

    26.8%

    New Brunswick

    29.0%

    13.5%

    29.0%

    Nova Scotia

    31.0%

    13.5%

    31.0%

    Prince Edward Island

    31.0%

    15.0%

    31.0%

    Newfoundland

    30.0%

    13.5%

    30.0%

     

    b) employment income and pensions
    Employment income and pensions are taxed as regular income.

    c) VAT (or other indirect tax)
    Canada imposes a federal VAT (known as the goods and services tax (GST)) on the supply of most goods and services at rate of 5%. Certain provinces have harmonized their provincial sale taxes to the GST and impose an additional tax on top of the federal tax, namely Ontario (8%), Nova Scotia (10%), New Brunswick (10%), Prince Edward Island (10%) and Newfoundland (10%). The province of Quebec imposes its own VAT (known as QST) on the supply of most goods and services at a rate of 9.975%.

    The provinces of British Columbia (7%), Saskatchewan (5%) and Manitoba (8%) impose a sales tax on the supply of goods.

    The province of Alberta does not impose a provincial sales tax.

    d) savings income and royalties
    Savings income and royalties are taxed as regular income.

    e) income from land
    Income from land is taxed as regular income.

    f) capital gains
    Capital gains are taxed at half the rate of regular income.

    g) stamp and/or capital duties
    None.

  15. Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?

    Yes. Income tax is imposed based on the profits of the business for the fiscal period. However, there are provisions of the Income Tax Act which may require different treatment than commercial accounting principles, such as capital cost allowance rates for the depreciation of capital property.

  16. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?

    Corporations and trusts are treated as separate taxable entities under Canadian income tax law. However, a trust is treated as a flow-through entity and not subject to income tax if distributes all of its income and gains for the year to its beneficiaries. Partnerships are not treated as taxable entities.

    Limited partnerships are transparent for tax purposes and are primarily used as private collective investment vehicles. Limited partnerships can also be used to carry on an active business; however this is less common.

    Mutual fund trusts are not transparent for tax purposes; however, they are typically taxed as a flow-through vehicle. They are typically used for public collective investment vehicles and REITs. They are not appropriate for carrying on an active business in Canada.

    Canadian unlimited liability companies (ULCs) are not transparent for Canadian tax purposes. However, they are transparent for United States tax purposes. As a result, they are often used in structuring investments into Canada by US entities in order to achieve US tax benefits.

  17. Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?

    Residents of Canada are subject to Canadian income tax on their worldwide income. Non-residents are subject to Canadian income tax on income from carrying on business in Canada, from being employed in Canada or from the disposition of “taxable Canadian property (see question 21). A non-resident may be exempted from Canadian income tax pursuant to an applicable tax treaty. Most of Canada’s tax treaties provide that a non-resident’s Canadian source business income will only be subject to Canadian income tax to the extent that it was earned from a Canadian permanent establishment.

    Corporations that are incorporated under Canadian law are deemed by statute to be residents of Canada. In addition, under common law rules, a corporation that is not incorporated under Canadian law is resident in Canada if its central management and control is in Canada. This is generally considered to occur where the corporation’s board of directors exercises its responsibilities. However, where a shareholder effectively exercises control rather than the Board, the corporation will be considered to be resident where the shareholder resides. A similar central management and control test applies to trusts and their trustees.

    The threshold for carrying on business in Canada is low and is generally governed by common law rules that evaluate all of the activities of the non-resident in Canada with a particular emphasis on the place where contracts are made and the location of the operations from which the profits arise. In addition, the meaning of “carrying on business in Canada” is extended by statute to include situations where (a) the non-resident solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly inside and partly outside Canada; and (b) the non-resident (or an agent acting on behalf of the non-resident) produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada, whether or not it is exported from Canada prior to its sale.

  18. Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?

    Canada does not have any special taxation regimes such as these. However, there are special tax credits available to encourage investment in certain activities in Canada, such as film and video production and scientific research and experimental development (see question 19).

  19. Are there any particular tax regimes applicable to intellectual property, such as patent box?

    Canada does not have a patent box regime.

    Canada does have a tax incentive program for scientific research & experimental development (SRED) performed in Canada. Under this program, a taxpayer carrying on business in Canada is permitted a current deduction for SRED expenditures that would otherwise not be deductible on the basis that they were capital expenses or were not incurred for the purpose of earning income from business or property. In addition, an investment tax credit is available for many types of SRED expenditures. Generally, a non-refundable tax credit equal to 15% of qualified SRED expenditures is available. For small Canadian-controlled private corporations, a refundable tax credit equal to 35% of qualified SRED expenditures is available. This can be an important source of government funding for early stage Canadian owned technology companies. Certain provinces have similar tax credit programs to encourage scientific research and development.

  20. Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?

    Canada’s corporate tax system does not have a concept of consolidation. Certain types of inter-company loss consolidation transactions between related Canadian corporations are accepted by the Canadian tax authorities. These loss consolidation techniques cannot be used to import foreign losses into Canada.

  21. Are there any withholding taxes?

    Canada imposes withholding tax at a statutory rate of 25% on a number of types of payments from Canada to non-residents, including dividends, trust distributions, rents, royalties and management fees. Withholding tax does not apply to interest payments made to arm’s length non-residents, unless the interest is “participating debt interest”. The withholding tax rate may be reduced or eliminated by a tax treaty. For instance, under the Canada-US Tax Treaty there is an exemption from withholding tax on non-arm’s length interest payments.

    A 15% withholding tax applies to amounts paid to a non-resident of Canada for services rendered while physically in Canada. This withholding tax is a prepayment of the non-resident’s Canadian income tax from carrying on a business in Canada. If the non-resident is entitled to the benefits of a Canadian tax treaty, then the withholding tax may be refunded on the filing of a Canadian tax return if the non-resident does not have a Canadian permanent establishment.

    Where a non-resident disposes of “taxable Canadian property”, the purchaser is required to withhold 25% of the purchase price unless it is provided with a tax clearance certificate issued by the Canada Revenue Agency. Such a tax clearance certificate will be issued if the seller has paid or provided security for any Canadian capital gains tax arising from the disposition. “Taxable Canadian property” generally includes (a) Canadian real property, (b) property used in a business carried on in Canada, (c) designated insurance property, and (d) equity interests in corporations, partnerships or trusts that derived more than 50% of their value from (1) Canadian real property, (2) Canadian resource properties and/or (3) Canadian timber properties at any time in the 60 month period prior to the disposition. In the case of corporations that are listed on a designated stock exchange, mutual fund corporations and mutual fund trusts, the non-resident seller must have held at least 25% of the issued shares or units at any time in the 60 month period prior to the disposition in order for the shares or units to be treated as “taxable Canadian property”.

  22. Are there any recognised environmental taxes payable by businesses?

    The Canadian federal government has recently announced plans to introduce a carbon tax beginning in 2018. The tax will be $10 per metric tonne in 2018 increasing by $10 every year to a total of $50 in 2022 for all provinces without their own carbon tax. The provinces of Alberta and British Columbia have a carbon tax in place at rates of $30 per metric tonne.

    The provinces of Ontario and Quebec have introduced cap and trade systems with respect to greenhouse gas emissions.

    Federal and provincial fuel taxes apply to the sale of gasoline, diesel, propane, furnace oil and natural gas.

  23. Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?

    Canadian resident individuals are subject to income tax on the receipt of dividends. The tax rate depends on whether the dividend is received from a Canadian or foreign corporation and, in the case of dividends from Canadian corporations, whether the dividend is an “eligible dividend” or not. Dividends from foreign corporations are treated as regular income and subject to the highest marginal rate of tax. Foreign tax credits should be available for any foreign withholding taxes paid on the dividend.

    Dividends from taxable Canadian corporations are subject to a lower rate of tax to account for the Canadian corporate level tax that was already paid on the income generating the dividend. Taxable Canadian corporations can designate their dividends to be “eligible dividends” to the extent that they have earned income that is subject to the general corporate tax rate. “Non-eligible dividends” relate to income that has been subject to a corporate tax rate that is lower than the general rate (such as income that can benefit from the small business deduction). Eligible dividends are subject to a lower tax rate at the shareholder level than non-eligible dividends to reflect the higher general rate of tax paid at the corporate level.

    Taxable Canadian corporations are able to deduct dividends received from other Canadian corporations. However, a private corporation is subject to a refundable tax (known as Part IV tax) at a rate of 38 1/3% on such dividends unless it owns shares representing more than 10% of the votes and value of the dividend payor. Part IV tax is refunded at a rate 38 1/3% on dividends paid out to shareholders. In addition, dividends paid on preferred shares issued by Canadian corporations may be subject to special rules that deny the inter-corporate dividend deduction or impose a special tax.

    Taxable Canadian corporations are subject to Canadian income tax from dividends paid by non-resident corporations unless the non-resident qualifies as a “foreign affiliate”. A non-resident corporation will qualify as a “foreign affiliate” if the Canadian corporation has an equity percentage of at least 1% and together with all related persons has an equity percentage of at least 10%. Dividends received from a foreign affiliate will be free of Canadian tax if it is paid out of the foreign affiliate’s “exempt surplus”, which is generally income earned from carrying on a business in a country with which Canada has a tax treaty or tax information exchange agreement. Income that does not qualify as “exempt surplus” is generally treated as “taxable surplus”. Taxable surplus dividends paid by a foreign affiliate to a Canadian corporation are subject to Canadian tax; however a deduction is available to account for foreign taxes paid by the foreign affiliate and any withholding taxes on the dividend. Lastly, certain capital gains realized by a foreign affiliate are treated as “hybrid surplus”. Fifty percent of dividends paid out of “hybrid surplus” are included in the Canadian corporation’s income, as Canada only taxes 50% of capital gains. As with “taxable surplus” dividends, a deduction is available to account for foreign taxes paid on the capital gain creating the “hybrid surplus”.

  24. From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?

    Canada is not likely to be a jurisdiction that international groups would relocate to from the UK as a result of Brexit, as it is neither a low tax jurisdiction nor is it a member of the European Union.