On November 5, 2017, a massive leak of financial documents referred to as the Paradise Papers was released to the public. The leak involves multiple jurisdictions and contains nearly 13.4 million confidential electronic documents relating to offshore investment. The Paradise Papers comes largely from Appleby, a law firm based in Bermuda, and from the corporate registries of 19 tax havens.
The Paradise Papers cover the period from 1950 to 2016 and involve over 120,000 people and companies across the world, including government officials, entertainment personalities and corporate giants. It also involves more than 3,000 Canadian individuals and corporations, which is five times more than the ones from the Panama Papers.
On November 3, 2017, just a few days prior to this new leak, the Canada Revenue Agency (the “CRA”) delivered a statement (document) to highlight its work to combat tax evasion and tax avoidance. The CRA stated having “currently more than 990 audits and more than 42 criminal investigations related to offshore underway”, 123 of which involve participants and facilitators named in the Panama Papers. In light of the recent Paradise Papers leak, the CRA already announced that it is reviewing the data and promised to take “appropriate action”.
Furthermore, as part of the CRA’s strategy to combat offshore tax evasion and aggressive tax planning, the CRA announced earlier this year that a revised voluntary disclosures program policy would be introduced in 2018. The proposed changes were initially supposed to be implemented on January 1, 2018, but the CRA is delaying the implementation until March 1, 2018. The formal keys changes confirmed by the CRA will :
- eliminate the « no-names » disclosure process;
- require payment of the estimated tax at the time of the application;
- cancel relief if it is subsequently discovered that the application was not complete due to a misrepresentation; and
- create a two tracks system by introducing a « General Program » for minor non-compliance and a « Limited Program » for major non-compliance with limited relief in certain circumstances;
Such circumstances could include, for example :
- Situations where large amounts of tax were avoided;
- Active efforts to avoid detection and the use of complex offshore structures;
- Multiple years of non-compliance;
- Disclosures motivated by CRA statements regarding its intended focus of compliance, by broad-based tax compliance programs or by the reception of leaked confidential information by the CRA such as the Paradise Papers data leak; and
- Other circumstances in which the CRA considers that there was a high degree of guilt in the taxpayer’s conduct contributing to his failure to comply.
On December 15, 2017, the Canada Revenue Agency (the “CRA”) released new guidelines on the rules applicable to voluntary disclosures that are made (or for which the name of the taxpayer is disclosed) on or after March 1, 2018. Like the earlier draft guidelines, which were released on July 9, 2017, the new guidelines include a separation of the rules applicable to income tax voluntary disclosures and the rules applicable to disclosures of errors relating to GST/HST and other non-income taxes. Below is a summary of the new voluntary disclosures program for GST/HST (“VDP”).
The voluntary disclosures program allows taxpayers to make disclosures to the Canada Revenue Agency to correct inaccurate or incomplete information, or to disclose information not previously reported. We understand there were concerns within the CRA that the existing program was overly generous to participants in the program (as compared to taxpayers who had been fully compliant), and proposals to revise the program have been in the works for some time now. In this regard, the CRA issued an earlier version of the VDP guidelines for comments on June 9, 2017, with an initial proposed implementation date of January 1, 2018.
There was much speculation that this implementation date would be postponed, as well as hope that the final guidelines would address concerns expressed by many tax practitioners that certain proposed measures in the June 9, 2017 version were too harsh and would lead to few taxpayers choosing to avail themselves of the program. In the result, the new VDP guidelines includes significant improvements from the July 9, 2017 version. As compared to the program that is currently in place, the new VDP is more beneficial for taxpayers in some cases, and worse for taxpayers in others.
The new VDP includes three categories for disclosures, depending on the taxpayer’s circumstances.
Category 1 (GST/HST Wash Transactions Disclosures)
Category 1 disclosures include disclosures of errors relating to qualifying GST/HST “wash transactions”. This generally covers situations where a taxpayer who supplied goods or services fails to collect and remit tax as required, and the recipient would have been entitled to full input tax credits. Wash transactions will continue to be eligible for full relief from interest and penalties under the new VDP. As for the relevant period, these disclosures will require disclosure of previously inaccurate, incomplete or unreported information for the four calendar years before the date the VDP application is filed. Continue Reading
There has been much speculation on how Canada will tax cannabis, which is expected to be legalized for retail sale in Canada by July 2018. The much anticipated draft tax legislation was released by the Department of Finance on Friday November 10, 2017, and is out for consultation until December 7, 2017.
Proposed Tax Regime
Under the proposed cannabis tax regime, most supplies of cannabis will be subject to GST/HST (at rates currently ranging from 5-15% across Canada). Cannabis, both for recreational or medical use, will also be taxed under the Excise Act, 2001 (Canada) (the “Act”), which currently imposes federal excise duty on spirits, wine and tobacco product made in Canada. Both taxes on cannabis will be administered by the Canada Revenue Agency.
Similarly to the current GST/HST regime, the provinces and territories will be offered the option of joining the federal tax regime for cannabis taxation, in which case the excise duty on cannabis will be made up of the federal rate, plus an additional rate for the participating province or territory. The division of tax revenues is currently under discussion between the federal government and the provinces, which will be responsible for controlling the distribution and retail sales of cannabis in each province. In this regard, the federal government has indicated its goal of setting the maximum total excise duty rate at the greater of $1 per gram or 10 per cent of the sale price of the product.
Much has been written regarding the proposals released by the Department of Finance on July 18, 2017 to limit income splitting and holding passive investments inside a private corporation. A third measure, namely, placing limits on the conversion of income to capital gains is aimed at preventing an individual selling shares of a corporation to a non-arm’s length person followed by a sale by the non-arm’s length person to a connected corporation. The foregoing transaction would result in the individual realizing a capital gain based on the fair market value of the transferred share followed by the tax-free extraction of corporate surplus of the transferred corporation. This is considered an inappropriate conversion of what would otherwise be a payment of dividend income into a capital gain. The difference in tax rates is about 14%.
The problem is in the application. Discussions with officials from the Department of Finance indicate that these proposals will prevent some normal post death tax planning aimed at preventing double taxation of the same economic gain (the “pipeline plan”).
The pipeline plan is illustrated in the following example: Taxpayer A incorporates a company and invests $100 for shares of the company. The company starts a business or buys investments for $100. Ten years later the shares of the company are worth $5 million. Taxpayer A dies, a capital gain of $4,999,900 is realized. However, the cost of the assets or investments in the company remains at $100. Thus, if the assets or the investments are sold for $5 million, there is a gain of the same $4,999,900, i.e., the same gain is taxed twice, once in the hands of the deceased taxpayer and once in the hands of the company. To prevent this economic double taxation, the shares of the company are sold by the estate of Taxpayer A to a new corporation for the same $5 million which then is amalgamated with the company. The tax result is that the cost base of the assets in the amalgamated company and paid-up capital of the shares of the amalgamated company is increased to $5 million. This prevents double taxation of the same gain.
Yet, the Department of Finance officials have indicated that the pipeline plan is not available because the transfer of the shares from the deceased Taxpayer A to his estate is a non-arm’s length transfer that is caught by the new proposal. It is a stretch to think of death as a “specific type of avoidance transaction”.
There is a procedure available to deal with the double taxation issue but there is a stringent time requirement which often causes such a procedure to not be available.
The Minister of Finance should heed the words of Shakespeare “Striving to do better, oft we mar what’s well”. At a bare minimum, the Minister should announce that these rules will not affect pipeline transactions.
 See also our commentary on the proposal, “Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal“.
 Namely, making an election pursuant to subsection 164(6).
(The full version of this bulletin was originally published on Fasken.com – “The Federal Government’s Proposals Targeting Private Corporation Tax Planning” – August 3, 2017.)
On July 18, 2017 (the “Consultation Date”), the Minister of Finance (Canada), the Honourable William Morneau, released the Government’s proposals to address tax planning commonly used by private corporations and their owners in the form of a paper (the “Consultation Paper”) and draft legislation amending the Income Tax Act (Canada) (the “Tax Act”) to implement certain of the proposed measures.
The Government addresses three broad issues in the Consultation Paper:
- sprinkling income using private corporations;
- holding a passive investment portfolio inside a private corporation; and
- converting a private corporation’s regular income into capital gains.
Selected proposals and tax measures are detailed below.
Details of the Proposed Tax Measures
The Consultation Paper notes that the Government has imposed a progressive personal income tax system with five marginal tax rates ranging between 15 percent and 33 percent that apply at different taxable income thresholds. The Government is concerned with arrangements that effectively transfer income that may otherwise be taxable in the hands of a high-income individual to a family member subject to lower tax rates resulting in lower tax receipts for the Government (“income sprinkling”).
The Tax Act currently has a number of provisions that deny or limit the potential benefits of income sprinkling, but the Government believes that additional measures are necessary with a particular focus on investments in private corporations.
Proposed Tax Measures
The measures proposed by the Government fall into three categories:
- extension of the tax on split-income (“TOSI”) provisions;
- restricting claims under the lifetime capital gains exemption (the “LCGE”); and
- new tax reporting obligations applicable to trusts and partnerships.
Continue reading to learn how the Canadian Federal Government’s announced target tax planning strategies affect private corporations.