Canada: Tax (4th edition)

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in the 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-4th-edition/

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

    Every spring, Canada’s Minister of Finance tables a budget that contains the Federal Government’s fiscal policy in general terms as well as a detailed list of amendments to the Income Tax Act, the Excise Tax Act and other tax statutes. The Income Tax Act is administered by the Minister of National Revenue, but amendments are proposed by the Minister of Finance and they must be approved by both houses of Parliament (House of Commons and Senate). A budget is a matter of confidence, which means that the government must resign should the budget not be approved by the House of Commons. Typically, once the budget is approved, the statute applies retroactively to the date on which the budget was originally tabled. The Minister of Finance can also announce other changes to tax laws in press releases, subject to legislative measures to be adopted later with retroactive effect.

  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?

    Canada has a self-reporting system. A tax return in prescribed form must be filed with the Canada Revenue Agency for each taxation year. The filing deadline will vary: April 30 for individuals, June 15 for individuals carrying on a business, six months after the end of the financial year for corporations and 90 days from the end of the year for trusts and estates. Any information disclosed to the Canada Revenue Agency is confidential and no government official can knowingly provide, or knowingly allow to be provided to any person, any taxpayer information.

    Taxpayers are required to keep adequate books and records for a period of up to 6 years, and longer if the a taxation year is being disputed.

  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 key tax authority in Canada is the Canada Revenue Agency. It collects most federal and provincial income taxes (both personal and corporate) and commodity taxes. The Province of Quebec is in charge of collecting its own provincial taxes, through the Quebec Revenue Agency.

    The Canada Revenue Agency has vast audit powers to ensure that returns are truthfully prepared. A tax auditor may at all reasonable times inspect, audit or examine the books and records of a taxpayer, and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books and records of the taxpayer or to any amount payable by the taxpayer. These powers amount to a seizure that is deemed acceptable under the Canadian Charter of Rights and Freedoms on the basis that the taxpayer has a very low expectation of privacy in relation to the kind of information contained in its books and records for tax purposes.

    The period of time within which the Canada Revenue Agency is expected to carry out its tax audit and issue a reassessment is the normal reassessment, which ends 3 years (for an individual or private corporation), 4 years (for a public corporation) or 7 years (for transactions involving a non-resident) years after the issuance of the initial notice of assessment.

    A taxpayer has 90 days from the date of mailing of a notice of assessment to file a notice of objection. The objection must be in writing and must set out the reasons for the objection and the relevant facts.

    Large corporations must reasonably describe each issue to be decided, specify in respect of each issue the relief sought expressed as the amount of a change in a balance, and provide facts and reasons relied on by the corporation in respect of each issue, otherwise it may result in the rejection of the notice of objection.

    The Canada Revenue Agency shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess upon receipt of the objection. The taxpayer must be notified in writing. In practical terms, it may take several months or years.

    The objection process can be bypassed. If 90 days have elapsed after service of the notice of objection, the taxpayer can appeal directly to the Tax Court of Canada.

  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 may appeal to the Tax Court of Canada to have the assessment vacated or varied within 90 days after the Canada Revenue Agency has confirmed the assessment. The Tax Court of Canada can sit basically anywhere in Canada. It is composed of 22 judges. In a tax appeal, its jurisdiction is limited to dismissing it or allowing it and vacating the assessment, varying the assessment or referring the assessment back to the Canada Revenue Agency for reconsideration and reassessment.

    The appeal is formed by a notice of appeal filed by the taxpayer or his or her counsel. The notice of appeal must summarize the relevant facts, state the question at issue, list the relevant statutory provisions relied upon, state the taxpayer’s arguments and the reliefs sought.

    Sixty (60) days later, the Canada Revenue Agency must file a reply to the notice of appeal which must contain the assumptions based on which the assessment was made. The assumptions will determine what the taxpayer will have to demonstrate to quash the assessment.

    Then the parties have to agree on a timetable for the lists of documents, the examination for discovery, the satisfaction of undertakings and the date of hearing.

    The process – from the Notice of Appeal to the trial – can take anywhere between 6 months to 2 years.

    An assessment is deemed valid and it is up to the taxpayer to prove that it is ill-founded. When the assessment is being appealed to the Tax Court, the debate on the validity of the assessment largely focuses on the assumptions listed in the reply, which are presumed valid. It is a simple presumption that can be countered by a prima facie case.

  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?

    Taxes are typically payable by individuals on or before April 30, each year. Taxes are also paid by instalments by taxpayers (including individuals and corporations) generating business income, in which case instalments are paid every quarter (March, June, September and December).

    When an assessment is being contested, collection measures are normally suspended and the taxpayer can wait until the Tax Court judgment before any payment is required to be made. For large corporations, 50% must be paid in spite of an objection. For sales taxes and payroll taxes assessments, 100% must be paid even if an objection is filed.

    Should the collection measures be suspended, compound interest is applicable on a daily basis. If taxes are paid and later refunded by the Canada Revenue Agency (e.g. if the Tax Court finds in favor of the taxpayer), interest will be paid to the taxpayer form the date the amount had been paid.

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

    Audit powers can only used only for the ultimate purpose of issuing a reassessment as opposed to a criminal investigation. Where the predominant purpose of a particular inquiry is the determination of penal liability (and not tax), the Canada Revenue Agency must not use its audit powers. Rather, evidence must be gathered in accordance with the rules applicable in criminal matters (right to remain silent, presumption of innocence, proof beyond reasonable doubt).

    Otherwise, the general rule is that the Canada Revenue Agency has access to any document and information relevant to the Income Tax Act, if the document is not protected by solicitor–client privilege, i.e., where legal advice is sought from a professional legal adviser. The communications relating to that purpose, made in confidence by the client, are permanently protected from disclosure. Communications made to facilitate the commission of a crime or fraud will not be confidential.

    Communications between a taxpayer and a chartered professional account, unlike a lawyer, are not protected by solicitor–client privilege. The Canada Revenue Agency’s position is that it can access an accountant’s file. However, they cannot do so in a routine, uncontrolled manner. For example, tax accrual working papers prepared for the purpose of financial statements would normally not be subject to disclosure.

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

    The test for residence is by and large inspired by the common law rule pursuant to which a corporation will be resident where its central management and control is located; in practical terms, the board of directors. In addition, there is a deeming rule found in the Income Tax Act to the effect that a corporation that is incorporated in Canada is deemed to be a Canadian resident.

    Trusts used to be resident for tax purposes wherever their trustees resided. It is now recognized that the Canada Revenue Agency can look beyond the trustee’s residence and apply to trust substantially the central management and control test applied to corporations. In that case, the Canada Revenue Agency will try to identify who is the real decision-maker and where does he or she reside.

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

    The Canada Revenue Agency is increasingly active in international tax audits. The Government of Canada has publicly announced that it would continue to support the Canada Revenue Agency’s efforts by allocating additional funds for hiring new international tax teams. Transactions and investments made by Canadian individuals, corporations and trusts in low-tax jurisdictions are being targeted by the international tax teams. Once identified, taxpayers with offshore investments are typically called upon to answer a quite invasive questionnaire in which they will have to disclose all of their foreign transactions. A follow-up face-to-face interview is also frequently conducted by the tax auditors. The taxpayer can be assisted by a lawyer during the interview.

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

    The Canadian transfer pricing regime is based on the arm’s-length principle. The Income Tax Act provides for the application of this principle to transactions between Canadian residents and non-residents. It allows the Canada Revenue Agency to determine, modify and even re-characterize certain amounts (nature or quantum) for the purposes of computing tax so as to reflect arm’s-length conditions. Canada generally follows OECD principles.

    The Income Tax Act also has thin capitalization rules. The current debt / equity ratio is 1.5 : 1.

  10. Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?

    The Canadian GAAR was enacted in 1988. In spite of the GAAR, the fundamental principle remains valid: where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe. Three requirements must be established to permit the application of the GAAR:

    • a tax benefit resulting from a transaction or part of a series of transactions;
    • the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken primarily for a bona fide purpose other than to obtain a tax benefit; and
    • there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit and purpose of the provisions relied upon by the taxpayer.

    The taxpayer must refute the existence of a tax benefit and of an avoidance transaction. The Canada Revenue Agency must establish the existence of abusive tax avoidance. If the GAAR is found to apply, the Canada Revenue Agency can recharacterise the series of transactions so as to suppress the tax benefit.

  11. Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?

    The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (also known as MLI) has been signed by Canada. Canada has been an active participant in the base erosion and profit shifting project, for a number of years and has generally supported the OECD’s action plan on BEPS.

  12. In your view, how has BEPS impacted on the government’s tax policies?

    The BEPS project identified treaty shopping, as one of not the most important sources of concerns. Separate from the OECD developments on measures to prevent treaty shopping, Canada had proposed adopting a domestic principal purpose test that would have denied treaty benefits where the principal purpose of a transaction was to obtain those benefits.

    The Government of Canada has otherwise confirmed its commitment to address treaty abuse in accordance with the minimum standard. Going forward, Canada will consider either minimum standard approach, depending on the particular circumstances and discussions with Canada's tax treaty partners.

  13. 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?

    Canada has a mature and rather complex tax system that generally follows the OECD Model. Under the Constitution Act 1867, the federal Parliament can enact laws for the purpose of levying direct and indirect taxes, from domestic and foreign sources. Provinces can enact laws for the purpose of levying direct taxes within the province only. The principal taxes are imposed on income and goods and services (value-added taxes). Specific taxes also apply to fuel, tobacco and land transfer duties.

    As far as federal income tax is concerned, business profits, income from property (including rents, royalties, interest and dividends) are included in a corporation’s income. And individual can be taxed on the same sources of income, but can also generate taxable income from employment (unlike a corporation). Individuals can also contribute to tax savings accounts (e.g. RRSP and TFSA). In some cases, the contribution triggers a credit when it is made and the payment is taxable upon withdrawal. In other cases, the contribution and withdrawal are both tax neutral.

    All Canadian taxpayers – corporations, individuals and trusts – must also include in income their taxable portion (50%) of capital dividends generated in a given taxation year.

    Rates for Individuals

     

    Interest

    Capital Gains

    Eligible Dividends

    British Columbia

    49.80%

    24.90%

    31.44%

    Alberta

    48.00

    24.00

    31.71

    Saskatchewan

    47.50

    23.75

    29.64

    Manitoba

    50.40

    25.20

    37.79

    Ontario

    53.53

    26.76

    39.34

    Québec

    53.31

    26.65

    40.00

    New Brunswick

    53.30

    26.65

    33.51

    Nova Scotia

    54.00

    27.00

    41.58

    P.E.I.

    51.37

    25.69

    34.23

    Newfoundland & Lab.

    51.30

    25.65

    42.62

    Northwest Territories

    47.05

    23.53

    28.33

    Nunavut

    44.50

    22.25

    33.08

    Yukon

    48.00

    24.00

    28.92

    Rates for General Corporations

     

    Active Business Income

    Investment Income

    Federal Rates

     

     

    General corporate rate

    38.0%

    38.0%

    Federal abatement

    (10.0)

    (10.0)

     

    28.0

    28.0

    Rate reduction

    (13.0)

    (13.0)

     

    15.0

    15.0

    Provincial/territorial rates

     

     

    British Columbia

    12.0%

    12.0%

    Alberta

    12.0

    12.0

    Saskatchewan

    12.0

    12.0

    Manitoba

    12.0

    12.0

    Ontario

    11.5

    11.5

    Québec

    11.7/11.6

    11.7/11.6

    New Brunswick

    14.0

    14.0

    Nova Scotia

    16.0

    16.0

    Prince Edward Island

    16.0

    16.0

    Newfoundland & Labrador

    15.0

    15.0

    Northwest Territories

    11.5

    11.5

    Nunavut

    12.0

    12.0

    Yukon

    12.0

    12.0

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

    Accounting principles are, of course, very helpful tools, but they are not binding in Canada.

    The starting point is that taxpayers are entitled to arrange their affairs to minimise the amount of tax otherwise payable. Simply put, there is no substance over form doctrine pursuant to which a series of transactions could be revisited by the Canada Revenue Agency. The economic realities of a situation cannot be used to recharacterize a taxpayer’s bona fide legal relationships, absent a specific provision of the Income Tax Act to the contrary or a finding that they are a sham.

  15. 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?

    The Income Tax Act recognizes three taxpayers: individuals, corporations and trusts. Technically, a partnership is not a taxpayer; income is computed at the partnership level but it is allocated to the partners who are liable to pay tax. Unlimited liability companies (ULC) are not considered transparent entities; but they are recognized as such in the United States.

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

    Liability for income tax in Canada is by and large based on residence. Corporations, individuals and trusts can generate income from different sources identified in the Income Tax Act, which include income from business and property and capital gains. A resident taxpayer is liable to tax on his income from all sources on a worldwide basis. A non-resident taxpayer is liable to tax in Canada on his Canadian-source income.

    As indicated above, a corporation will be resident where its central management and control is located, i.e. the board of directors. There is a deeming rule found in the Income Tax Act to the effect that a corporation that is incorporated in Canada is deemed to be a Canadian resident.

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

    Canada and most provinces offer several generous tax credits in a variety of sectors, including scientific research and experimental development (SR&ED), films, multi-media, electronic commerce, etc. Certain credits are predicated on the taxpayer’s undertaking to carry on business in a specific location in order to create an environment in which several businesses with similar goals are located nearby.

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

    Canada has approached SR&ED not from the “patent box” angle but from the tax credit angle. Canada and most of the provinces have very generous tax credits regimes, including some refundable tax credits. The most generous tax credits are for Canadian-controlled private corporations, in which case the rate may me higher and the credit may be refundable (as opposed to a reduction of tax otherwise payable). Several high technology sectors have developed in large measure because of the Canadian SR&ED regime, including the aeronautical and pharmaceutical sectors.

  19. 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?

    Although there has been ongoing discussions on the opportunity to adopt a full or partial loss consolidation system in Canada, currently there is none, in large part due to the practical problems that it would cause to inter-provincial allocation of income and losses. There are, however, several loss-transfer techniques that may be considered, some of which are deemed acceptable by the tax authorities. Transfer of foreign losses is typically not an option.

  20. Are there any withholding taxes?

    A summary of the withholding rates for different countries can be found in the table below.

    Country

    Interest

    Dividends

    Royalties

    Annuities

    Australia

    10

    5/15

    10

    15/25

    China

    10

    10/15

    10

    25

    France

    10

    5/15

    0/10

    25

    Germany

    10

    5/15

    0/10

    15/25

    Hong Kong

    10

    5/15

    10

    25

    Israel

    10

    5/15

    0/10

    15/25

    Italy

    10

    5/15

    0/5/10

    15/25

    Japan

    10

    5/15

    10

    25

    Mexico

    10

    5/15

    0/10

    15/25

    Switzerland

    10

    5/15

    0/10

    15/25

    United Kingdom

    10

    5/15

    0/10

    0/10/25

    United States

    0

    5/15

    0/10

    15/25

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

    In Canada, taxation is a shared jurisdiction. Both the Federal and Provincial Governments can levy taxes.

    As of 2019, the Federal Government has adopted a carbon tax applicable to all provinces without a carbon tax already in place. Recently, several provincial governments have launched constitutional challenges over the Federal Government’s ability to impose such a tax.

    The Province of Quebec having enacted its own version of the “cap and trade” system in place in California, it is exempted from the federal carbon tax.

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

    Dividend must be included in income as income from property by Canadian taxpayers. When the shareholder (recipient of the dividend) is a corporation, and the payer is a Canadian corporation, a deduction in the amount of the dividend is possible; hence an inter-corporate dividend can be paid tax-free. When the two corporations are not connected, a temporary tax has to be paid, subject to a refund when a dividend is subsequently paid by the recipient corporation.

    A private corporation also has the opportunity of declaring tax-free capital dividends out of its capital dividends account (composed of the non-taxable portion of capital gains generated at the corporate level).

  23. If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?

    The UK and the EU are just about to face the consequences of Brexit. Financial services firms globally need to ensure that they understand the impact of Brexit on their business so they can manage the challenges and pursue the opportunities. This is just a beginning and it is very difficult to predict with certainty the global long-term effects of Brexit.

    Having said that, Canada is a long-standing business partner of the UK. It shares, by and large, substantially similar business and banking practices. Accordingly, Canada has publicly indicated its willingness to enter into a comprehensive trade agreement with the UK should it step out of the EU. In my view, Canada will become a jurisdiction of choice in these times of trouble.