New Reporting Rules for Digital Platform Operators

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On November 3, 2022, the Department of Finance introduced draft legislation to implement the reporting and due diligence standards of the Model Rules for Reporting by Platform Operators (the “Model Rules”) developed by the Organisation for Economic Co-operation and Development.

The draft legislation proposes to implement these Model Rules as part of the new Part XX of the Income Tax Act (Canada) (the “ITA”). Under the new Part XX, certain platform operators (“reporting platform operators”) would be required to determine the jurisdiction of residence of certain of the sellers on their platforms (“reportable sellers”) and to report certain information in respect of these reportable sellers and their activities subject to certain due diligence standards. These measures were initially announced as part of the 2022 Federal Budget. New Part XX of the ITA is proposed to come into force on January 1, 2024. A public consultation period for the draft legislation will run until January 6, 2023.

Reporting Platform Operators

Reporting platform operators are platform operators that are:

  • resident in Canada;
  • resident or incorporated or managed in a partner jurisdiction and who facilitates the provision of relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada and elects to be a reporting platform operator; or
  • not resident in Canada or a partner jurisdiction, and who facilitates the provision of relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada.

A platform operator is an entity that contracts directly or indirectly with sellers to make a software platform available for the sellers to be connected to other users for the (i) provision of relevant services including the rental of either immovable property or a means of transport or personal services, or (ii) the sale of goods. A platform also includes operations to collect compensation from users for the relevant activities (e.g. sale of goods, personal services, real property rentals) facilitated through the platform. Reporting platform operators are subject to the information reporting obligations under new Part XX unless they are an “excluded platform operator”.

Platform operators are excluded from the rules in Part XX if they can demonstrate that the platform’s underlying business model is such that sellers cannot derive a profit from compensation in connection with relevant activities through the platform, or that facilitate relevant activities through the platform only for sellers that are not reportable sellers.

There are further exemptions with respect to software platforms that exclusively facilitates the processing of compensation in relation to relevant activities; the mere listing or advertising of relevant activities; and the transfer of users to another platform, provided, in each case, that there is no further intervention in the provision of relevant activities.

Reportable Sellers

Reportable sellers will generally be active users (other than “excluded sellers”) that are determined by the reportable platform operator to:

  • be resident in a reportable jurisdiction;
  • have provided relevant services for the rental of immovable property located in a reportable jurisdiction; or
  • have been paid or credited consideration in connection with relevant services for the rental of immovable property located in a reportable jurisdiction.

A reportable jurisdiction is Canada or one of the partner jurisdictions with which there is an agreement in place to collect and share information in accordance with the Model Rules.

Specific exemptions will be provided for “excluded sellers” who generally include sellers of more than 2,000 relevant services for the rental of immovable property (i.e. large-scale hotels), governmental entities, certain public companies, and sellers with very low volume (less than 30 sales per year) and low value sales (not exceed €2,000 per year).

Reporting Requirements

Reporting platform operators would need to complete due diligence procedures to identify reportable sellers and their jurisdiction of residence including collection and verification of each reportable seller’s name, primary address, date of birth, tax identification number (“TIN”), the jurisdiction in which the TIN was issued, business registration number for entities, and the address of each property listed on the platform.

With respect to each reportable seller that provided relevant services, rented out a means of transportation or sold goods, the reporting platform operator is also required to report: (i) financial account identifiers to the extent available, (ii), the name of the holder of the financial account to which the consideration is paid or credited if such name is different from the name of the reportable seller, (iii) each jurisdiction in which the reportable seller is resident, (iv) the total consideration paid or credited during each quarter of the reportable period and the number of such relevant activities or relevant services in respect of which it was paid or credited, and (v) any fees, commissions or taxes withheld or charged by the reporting platform operator during each quarter of the reportable period.

With respect to each reportable seller that provided relevant services for the rental of immovable property, the reporting platform operator is also required to report the address of each property listing and, if available, the land registration number and where available, the number of days each property listing was rented during the reportable period and the type of each property listing.

The reporting platform operator is also required to determine whether the information collected is reliable, using all records available to the reporting platform operator, as well as any publicly available electronic interface to ascertain the validity of the TIN.

The reporting platform operator would be required to report to the Canada Revenue Agency such information on reportable sellers by January 31 of the year following the calendar year for which a seller is identified as a reportable seller. Reporting platform operators would also be required to provide the information relating to each reportable seller to that seller by the same date.

There is an anti-avoidance rule which provides that where a person enters into an arrangement or engages in a practice, the primary purpose of which is to avoid an obligation under new Part XX, the person is subject to the obligation as if the person had not entered into the arrangement or engaged in the practice.

Written by: Kevin Yip and Puyang Zhao

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Incorporating an Ontario Corporation: Bill 213 Amendments and Tax Considerations

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On December 8, 2020, Bill 213, Better for People, Smarter for Business Act, 2020 received royal assent. The bill includes significant amendments to the Business Corporation Act (Ontario)[1] (the “OBCA”). The amendments to the OBCA in Bill 213 were proclaimed into force on July 5, 2021.

Bill 213 eliminates the requirement that 25% of the directors of an Ontario corporation must be resident Canadians.[2] This means that non-residents may incorporate an Ontario corporation without necessarily retaining a Canadian resident as a director of the corporation (as already permissible in other jurisdictions).

In light of the new changes, many non-residents will likely consider incorporating an Ontario subsidiary to facilitate acquisitions, tax planning, and investment-related activities. This article highlights some of the (new) corporate and tax advantages of incorporating an Ontario subsidiary by such persons.

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Seven areas the Canada Revenue Agency is scrutinizing

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The 2021 Federal Budget devoted an additional $304.1 million to the CRA to help it combat tax evasion and aggressive tax avoidance.  The federal government expects to recover $810 million in revenues over five years.

Based on public documents and information gathered from the CRA and DOJ, we have generated the below list of CRA audit activities already underway and expected to increase over the next couple of years.  Even if a taxpayer has done nothing wrong, they may still have to convince eager auditors that they have complied with the law.

  1. CEWS Applications
  • As of March 25, 2021, the CRA has processed and approved more than 2.7 million Canada Emergency Wage Subsidy (“CEWS”) applications for businesses, charities, and organizations in the not-for-profit sector, delivering over $71 billion in payments to support over 5 million workers.
  • The CRA started post-payment CEWS audits in August 2020 and is looking for deliberate non-compliance.  Should CEWS funds have been misused, the penalties can include repayment of the wage subsidy, an additional 25% penalty, and potentially imprisonment in cases of fraud.
  • As this is new audit subject matter, CRA auditors may be inexperienced and skeptical.  Even if a taxpayer did not intend non-compliance, they will need help convincing the CRA that any mistakes were honest. 

2. Gains or Income from Cryptocurrency Transactions 

  • The CRA is pursuing persons who have transacted with cryptocurrency to ensure that the proper taxes have been paid.  The Federal Court recently granted the Minister of National Revenue’s application to require a major cryptocurrency trading platform to produce to the CRA a list of customer accounts along with details of transactions involving cryptocurrency.   
  • Cryptocurrency (e.g., Bitcoin) is not legal tender.  Instead, it is a digital representation of value – a digital asset.  For purposes of the Income Tax Act, the CRA generally treats cryptocurrency like a commodity and will tax income from cryptocurrency transactions as business income or as a capital gain, depending on the circumstances.  

3. Transfer Pricing Transactions

  • The federal government wants to ensure that the appropriate amount of profit is reported in Canada and plans to strengthen transfer pricing legislation.  The CRA is ramping up transfer pricing audits and scrutinizing Canadian taxpayers who buy or sell goods or services with another entity within the same multinational group to determine if these transactions are priced properly.  These types of transactions are required to occur under arm’s length terms and conditions and Canadian taxpayers are required to keep all relevant records.  Taxpayers engaged in non-arm’s length cross-border transactions should be vigilant in determining appropriate pricing and maintaining supporting documentation.   

4. Transactions Involving Treaties

  • Over the last decade the media has spotlighted the use and misuse of international treaties to reduce or avoid taxes.  The international tax community has been working to close loopholes and tighten up treaty language to reduce aggressive tax avoidance and evasion.  The CRA is increasing its scrutinization of cross-border transactions involving the application of treaties that result in distorted and questionable tax positions. 

5. GST/HST Avoidance and Evasion 

  • The CRA is looking for unwarranted and fraudulent GST/HST refund and rebate claims.  It is increasing its audits of large businesses identified as having a high risk of non-compliance and others operating in industries considered high risk, such as the real estate development industry.  The CRA has consistently been actively auditing with respect to the GST/HST New Housing Rebate.

6. Tax Evasion Involving Trusts

  • The CRA is enhancing its abilities to identify tax evasion involving trusts, particularly in non-arm’s length transactions, cross-border activities, and transactions involving low/nil tax countries.

7. Shareholder Benefits

  • Recently, there has been an uptick in the CRA auditing the use by officers and employees of corporate assets, such as private jets and yachts.  If business is being conducted on these assets, the taxpayer needs to gather contemporaneous documents and maintain accurate log books to support their filing positions.

Sept secteurs sous la loupe de L’agence du revenu du Canada

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Le budget fédéral pour l’année 2021 a alloué un montant additionnel de 304.1 millions de dollars à l’ARC afin de l’aider dans sa lutte contre l’évasion fiscale et l’évitement fiscal agressif. Ce faisant, le gouvernement fédéral prévoit récupérer 810 millions de dollars au cours des cinq prochaines années.

À partir de la documentation et des informations publiques provenant de l’ARC et du Ministère de la Justice du Canada, nous avons mis en place la liste ci-dessous présentant les activités de vérification actuelles de l’ARC et qui sont sujettes à s’intensifier aux cours des prochaines années. Même si un contribuable n’a rien à se reprocher, il risque d’être tenu de convaincre les vérificateurs soucieux qu’il s’est véritablement conformé à la loi.

1. Demandes de subvention salariale d’urgence du Canada

  • En date du 25 mars 2021, l’ARC a traité et approuvé plus de 2.7 millions de demandes de Subvention Salariale d’Urgence du Canada (« SSUC ») provenant d’entreprises, de fondations, et d’organisations sans but lucratif et à payer plus de 71 milliards de dollars en guise de support à plus de 5 millions de travailleurs.
  • L’ARC a débuté ses vérifications à la suite de l’émission des paiements de SSUC en août 2020 dans l’optique d’intercepter des cas délibérés de non-conformité. En cas d’utilisation des sommes reçues à titre de SSUC à d’autres fins, des pénalités telles que le remboursement de la subvention salariale, une pénalité additionnelle de 25% ainsi qu’un emprisonnement possible en cas de fraude pourront être applicables.
  • Compte tenu du caractère nouveau et récent des activités de vérification à cet égard, les vérificateurs de l’ARC peuvent encore s’avérer inexpérimentés et sceptiques. Dans l’éventualité où un contribuable n’avait pas l’intention d’être en situation de non-conformité, il aura besoin de soutien afin de convaincre l’ARC que toute erreur de sa part qui aurait pu créer la situation de non-conformité était honnête et involontaire.

2. Gains ou revenu provenant des transactions de cryptomonnaie

  • L’ARC s’intéresse aux contribuables qui ont effectué des transactions avec de la cryptomonnaie afin de s’assurer que le traitement fiscal y afférent a été respecté. Récemment, la Cour fédérale a approuvé la demande de la Ministre du Revenu pour instaurer une vaste plateforme de négociation de cryptomonnaie dans le but de permettre à l’ARC d’obtenir une liste des comptes clients et davantage de détails concernant les transactions impliquant la cryptomonnaie.
  • La cryptomonnaie (e.g. Bitcoin) n’est pas une monnaie légale. Elle est plutôt la représentation numérique d’une valeur (un actif numérique). Aux fins de la Loi de l’impôt sur le revenu, l’ARC traite généralement les cryptomonnaies comme de la marchandise et qualifiera le revenu provenant des transactions de cryptomonnaie à titre de gain en capital ou de revenu d’entreprise, et ce, en fonction des circonstances propres à la situation du contribuable.

3. Opérations de prix de transfert

  • Le gouvernement fédéral souhaite s’assurer que le montant véritable des profits soit déclaré au Canada et planifie renforcer la législation sur les prix de transfert. L’ARC continue d’accroître ses vérifications sur les prix de transfert et de surveiller les contribuables canadiens qui achètent ou vendent des biens ou des services d’une autre entité au sein d’un même groupe multinational afin de déterminer si le prix de leurs opérations est correctement fixé. Ces types d’opérations sont tenus d’être réalisés aux mêmes termes et conditions que des personnes sans lien de dépendance et les contribuables canadiens ont le devoir de conserver tous les documents pertinents y afférent. Les contribuables ayant un lien de dépendance qui transigent de manière transfrontalière doivent également prêter une attention particulière à la détermination d’un prix approprié de transaction et à la conservation des documents justificatifs.

4. Examen et vérification des transactions impliquant des conventions fiscales

  • Au cours de la dernière décennie, les médias ont dévoilé l’utilisation à bon et à mauvais escient des conventions fiscales comme outils pour réduire ou éviter de payer de l’impôt. La communauté fiscale internationale continue de travailler à l’élimination des échappatoires fiscales et du resserrement des textes des conventions fiscales afin de réduire l’évitement fiscal agressif et l’évasion fiscale. L’ARC veille à accroître sa surveillance des transactions transfrontalières impliquant l’application des conventions fiscales qui aboutirait à des positions fiscales déformées et discutables.

5. Vérification de la TPS/TVH contre l’évitement et l’évasion

  • L’ARC lutte présentement contre les réclamations illicites et frauduleuses concernant les remboursements relatifs à la TPS/TVH. Elle continue de renforcer ses vérifications à l’endroit des grandes entreprises qui sont identifiées comme comportant un haut risque de non-conformité et d’autres industries, également perçues comme comportant un haut risque de non-conformité, telles que l’industrie du développement immobilier. L’ARC demeure active dans sa vérification des remboursements de la TPS/TVH pour les habitations neuves.

6. Enquête sur l’évasion fiscale impliquant des fiducies

  • L’ARC continue de renforcer ses capacités à identifier les tactiques d’évasion fiscale impliquant des fiducies, tout particulièrement au sein des transactions conclues entre les personnes ayant un lien de dépendance, les activités transfrontalières et les opérations impliquant des pays avec des taux d’imposition bas ou inexistant.

7. Vérification des avantages aux actionnaires

  • Récemment, il y a eu une augmentation des activités de vérification de la part de l’ARC à l’encontre de l’utilisation par les dirigeants et employés des sociétés des actifs corporatifs tels que les jets privés et les yachts. Dans l’éventualité où ces actifs sont utilisés dans le cadre de l’entreprise, le contribuable est requis de conserver toute la documentation pertinente y afférent et de tenir ses registres à jour au soutien de sa position fiscale telle que contenue dans sa déclaration d’impôts.

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