Category Archives: !Jurisdiction

Canada’s Cannabis Taxation Regime

photo-1503262167919-559b953d2408There 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.

Licensing, Stamping and Production

The proposed legislation requires cannabis producers to obtain a license from the Canada Revenue Agency under the Act (“Cannabis Tax License”), in addition to the license issued by Health Canada under the Cannabis Act.  The Cannabis Tax License is also required to package or stamp a cannabis product, or to sell, purchase or possess a cannabis product that is not packaged and stamped as required.  The licensee will be subject to a requirement to post security in an amount ranging from $5,000 to $5,000,000, depending on the expected amounts of duty payable, and will be valid for a maximum of two years, unless renewed.

It should be noted that GST/HST registration may also be required, in addition to the foregoing cannabis license registrations, where the small supplier threshold of $30,000 per annum is exceeded.  Provincial sales taxes may also need to be considered, as cannabis would be considered tangible personal property, and therefore may be subject to tax under provincial sales tax legislation in applicable jurisdictions.

Cannabis licensees will also need to apply for cannabis excise stamps, with the intended provincial or territorial market, indicating that duty has been paid.  The possession of counterfeit cannabis excise stamps, the unlawful possession of cannabis excise stamps or unstamped cannabis products, as well as diversions and other contraventions, will be subject to penalties, and may also fall under existing and new cannabis-specific offence provisions.

The proposed legislation also addresses the packaging of cannabis for retail markets, which will be required to include information as prescribed in the regulations.  Regulations will also address additional conditions for the licensing, production and sale of cannabis, including where and what activities may be conducted under a license.

Rates of Excise Duties

Cannabis products produced in Canada will be subject to excise duty at the manufacturing level. The tax will also be applied to both cannabis for medical purposes and to cannabis for non-medical purposes, which was apparently deemed necessary due to the potential compliance and diversion issues that may arise with differing tax treatment.

The federal excise duty will generally apply to fresh and dried cannabis, cannabis oils, and seeds and seedlings for home cultivation at the time that they are packaged, at the higher of the following two amounts:

– a flat rate per gram (50 cents for flowering cannabis, viable seed, vegetative cannabis plant; 15 cents for non-flowering cannabis)

– an ad valorem duty calculated as a percentage (5%) of the sale price of the packaged cannabis at the time of delivery from the federal licensee

The tax will only be payable at the time of delivery to the purchaser, or on certain importations, to the extent they are allowed.  Excise duty will also apply to cannabis that is unaccounted for, or is taken for consumption, analysis or destruction.

Exemptions

The excise duty regime for cannabis generally will not apply to cannabis products that are produced in Canada by an individual for the individual’s own personal use/medical purposes (or by a designated person for the medical purposes of another individual) that is in accordance with the relevant rules in the Cannabis Act or Controlled Drugs and Substances Act, as applicable.  Duty relief is also available in limited cases, including the taking of cannabis destruction in prescribed circumstances.

Entry into force

The cannabis tax regime is proposed to come into force on commencement day (when adults will be able to legally purchase and possess cannabis for non-medical purposes).  Certain provisions, including licensing and stamping requirements, are proposed to come into force as at an earlier date.  Cannabis products that are delivered to a purchaser before commencement day, for sale and distribution after that day, will be subject to excise duty.

GST/HST

Cannabis products will also be subject to GST/HST, with limited exception.  In this regard, the proposed amendments exclude from the zero-rated supplies in Part III of Schedule VI to the Excise Tax Act (Canada), food and beverages that are cannabis products, and viable seeds that are cannabis. The foregoing does not apply to viable grains or seeds that are industrial hemp for purposes of the Cannabis Act, which will continue to be zero-rated.

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New Proposals on the Taxation of Private Corporations can result in Double Taxation

ottawa-815375_1920Much 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.[1]  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.[2]

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.

 

[1]       See also our commentary on the proposal, “Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal“.

[2]       Namely, making an election pursuant to subsection 164(6).

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Five Fasken Martineau Partners make the 2017 Tax Controversy Leader’s list

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The 7th edition of the International Tax Review guide mentioned five partners of Fasken as leading tax dispute resolution lawyers in Canada. This prestigious recognition is based on their outstanding success in the past year and consistently positive feedback from peers and clients.

The five partners that made the Tax Controversy Leader’s list of 2017 are :

Congratulations to the listed partners!

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Cinq associés Fasken Martineau figurent dans la liste des chefs de file en litige fiscal

businessman-2056022_1920La 7e édition du répertoire International Tax Review fait mention de cinq associés de Fasken à titre de chefs de file dans le domaine du contentieux fiscal au Canada. Cette reconnaissance prestigieuse est basée sur leur succès remarquable au cours de la dernière année et des commentaires positifs de pairs et de clients.

Les cinq associés figurant dans la liste des chefs de file en litige fiscal de 2017 sont :

Félicitations aux associés nommés!

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Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal

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(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

Income Sprinkling

Background

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:

  1. extension of the tax on split-income (“TOSI”) provisions;
  2. restricting claims under the lifetime capital gains exemption (the “LCGE”); and
  3. 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.

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Panama Papers: Canada Revenue Agency moves into full gear

panama-1675062_1920This posts was originally published on White Collar Post under “Panama Papers: CRA getting tougher on tax evasion” – a Fasken Martineau blog.

We are beginning to see the legal enforcement fallout from the now infamous Panama Papers.  Canada Revenue Agency’s (CRA) concerted efforts to find undeclared offshore money and assets is moving into full gear. In addition to pursuing typical civil audits, the CRA is now executing search warrants and launching criminal investigations for tax evasion.

The CRA is actively gathering information from domestic and international sources to identify and charge offenders criminally. Since 2015, the Canadian government has required domestic financial institutions to report to the CRA all international electronic fund transfers of $10,000 or more.  In addition, as of March 2016 the CRA has analyzed over 41,000 transactions worth over $12 billion dollars, involving four jurisdictions and particular financial institutions of concern, and has initiated risk assessments on 1,300 individuals named in the Panama Papers. This has resulted in approximately 122 CRA audits to date and counting. However, it is not just taxpayers who are subject to the CRA’s scrutiny and who may be criminally charged. The CRA is also investigating the enablers and advisors, including the lawyers and accountants, who facilitated the hiding of taxpayer money and assets offshore.

Continue Reading »

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3 months to Doomsday: Offshore assets & Automatic exchange of information

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What is the “automatic exchange of financial information”

In order to increase tax transparency across the globe, the Organisation for Economic Co-operation and Development (OECD) adopted the Common Reporting Standard (CRS) on July 15, 2014. The CRS initiative calls on each participating jurisdiction to obtain information from financial institutions within their country and automatically exchange that information with other jurisdictions on an annual basis. The objective is to increase tax compliance by providing key information to the participating jurisdictions allowing them to identify whether their citizens accurately report their foreign assets and income. However, since the CRS is not constraining, 90 jurisdictions have also signed the Multilateral Competent Authority Agreement (MCAA) on automatic exchange of financial account information. The MCAA provides a mechanism to facilitate the exchange of information in accordance with the CRS. Such information to be disclosed includes the following :

  • The name, address, taxpayer identification number, date and place of birth of each account holder;
  • The account number;
  • The name and identifying number of the financial institution;
  • The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) as of the end of the relevant calendar year or the closure of the account;
  • The total gross amount of interest, dividends and other income generated with respect to the assets held in the account.

Continue Reading »

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Actifs étrangers et échange automatique de renseignements : 3 mois avant l’apocalypse

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Qu’est-ce que « l’échange automatique de renseignements financiers »?

Afin d’accroître la transparence fiscale à travers le monde, l’Organisation de coopération et de développement économiques (OCDE) a adopté la norme commune de déclaration (NCD) le 15 juillet 2014. L’initiative de la NCD invite les juridictions participantes à obtenir des renseignements auprès des institutions financières de leur pays et à les échanger automatiquement avec d’autres juridictions sur une base annuelle. L’objectif est d’accroître l’observation des règles fiscales en fournissant des renseignements importants aux juridictions participantes afin de leur permettre de déterminer si leurs citoyens déclarent correctement leurs actifs et leurs revenus étrangers.

Cependant, puisque la NCD n’est pas contraignante, 90 juridictions ont également signé l’Accord Multilatéral entre Autorités Compétentes (AMAC) sur l’échange automatique de renseignements financiers. L’AMAC fournit un mécanisme pour faciliter l’échange de renseignements conformément à la NCD. Les renseignements à divulguer comprennent ce qui suit :

  • Le nom, l’adresse, le numéro d’identification du contribuable et la date et le lieu de naissance de chaque titulaire du compte;
  • Le numéro de compte;
  • Le nom et le numéro d’identification de l’institution financière;
  • Le solde ou la valeur du compte (y compris, dans le cas d’un contrat d’assurance comportant une valeur de rachat ou d’un contrat de rente, la valeur de rachat) à la fin de l’année civile concernée ou à la fermeture du compte;
  • Le montant total des intérêts, des dividendes et des autres revenus générés relativement aux actifs détenus dans le compte.

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Why now is the time to do a voluntary disclosure of foreign assets

money-515058_1920The Canada Revenue Agency’s (the ‘’CRA’’) voluntary disclosures program allows taxpayers who meet certain conditions to correct inaccurate or incomplete information previously submitted to the CRA, or to disclose information not previously reported on their tax form. Under the current voluntary disclosures program, those who make a valid disclosure will be responsible for paying the taxes and reduced interest owing as a result of their disclosure, the whole without penalties or fear of prosecution. However, access to the voluntary disclosures program will be limited in the near future and radical changes will be introduced.

Access to the voluntary disclosures program limited for some and radical changes for others

However, on May 29, 2017, the CRA announced by the way of its Report on Progress that a revised voluntary disclosures program policy would be introduced shortly. The changes sought will tighten the access to the voluntary disclosures program and the relief provided. This announce by the CRA is made after the recommendation from the Standing Committee on Finance to conduct a review of the voluntary disclosures program as part of the strategy to combat offshore tax evasion and aggressive tax planning.

In completing its review of the program, CRA sought input from the Offshore Compliance Advisory Committee (the ‘’OCAC’’). In December 2016, the OCAC released the ‘’Report on the Voluntary Disclosures Program’’ which sets out different recommendations to ‘’improve’’ the program. The main contemplated alterations are to, in certain circumstances :

  1. increase the period for which full interest must be paid;
  2. reduce penalties relief in certain circumstances so that the taxpayers pay more than they would pay if they had been fully compliant; and
  3. even deny relief from civil penalties.

Such circumstances could include, for example :

  • Situations where large dollar 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 Panama Papers data leak; and
  • Other circumstances in which the CRA considers that the high degree of the taxpayer’s culpability contributed to the failure to comply.

Less certain and more expensive results

If implemented by the CRA, the recommendations of the OCAC would significantly change the current voluntary disclosures program and the result of a disclosure would be more discretionary and expensive. Therefore, taxpayers entertaining the possibility of making a voluntary disclosure may want to act soon as the CRA intends to tighten the criteria for acceptance into the voluntary disclosures program and to be less generous in its application.

For more information about filing a voluntary disclosure download “The Voluntary Disclosures Programs in Canada (And in Québec)“.

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English vs French – Linguistic favoritism by Tax Court Judge : decision quashed by the FCA

 Fasken Martineau Tax bulletin

In Industrielle Alliance vs. Mazraani and MNR[1], the Federal Court of Appeal recently quashed a Tax Court of Canada decision on the basis that the trial judge violated the linguistic rights of both witnesses and counsel for Industrielle Alliance. The reasons for judgment can be found here in English and French.

The Tax Court of Canada decision

Before the Tax Court of Canada (TCC), Kassem Mazraani[2] appealed the Minister’s determination that he was not engaged in insurable employment while working for Industrielle Alliance between April and November 2012. Industrielle was an intervenor to the appeal and had taken the position that the Minister’s determination was correct since an independent contractor agreement had been concluded with Mazraani. The appeal was heard under the informal procedure before Justice Archambault and the hearing lasted 6 days. Mazraani filed his appeal in English, the Minister’s reply was in English also and Industrielle’ s intervention was in French.

In a massive 160 page decision, the TCC concluded that Mazraani was engaged in insurable employment.

Continue Reading »

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