Author: Alain Ranger

COVID-19: Administrative Accommodations by the Canada Revenue Agency (“CRA”) with respect to International Tax Matters

In light of the COVID-19 crisis and the travel restrictions implemented by Canada and many other jurisdictions as well as by businesses (the “Travel Restrictions”), the CRA has temporarily relaxed the way it administers certain rules and requirements contained in the Income Tax Act (Canada) (“ITA”) to account for the “forced” and involuntary presence of many non-residents in Canada for an extended period of time. As no one knows how long these Travel Restrictions will remain in effect, the guidelines described below, which apply from March 16, 2020 to June 29, 2020, may be extended by the CRA if necessary.

Deemed Residence: 183-Day Rule

For an individual, being subject to Canadian tax depends on his or her tax residence, which remains essentially a question of fact determined according to connecting factors established in common law. On the other hand, and subject to any applicable tax treaty, a non-resident who, in a calendar year, remains in Canada for more than 183 days is deemed to be a Canadian tax resident for the entire year and as such, becomes subject to Canadian tax on his worldwide source of income.

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COVID-19 : Assouplissements administratifs de la part de l’Agence du revenu du Canada (« ARC ») en matière de fiscalité internationale

Compte tenu de la crise de la COVID-19 et des interruptions de déplacement décrétées par le Canada et d’autres juridictions ainsi que par les entreprises (les « restrictions de voyage »), l’ARC a assoupli de façon temporaire sa façon d’administrer certains critères d’assujettissement contenus dans la Loi de l’impôt sur le revenu (Canada) (« LIR ») pour tenir compte de la présence « forcée » et involontaire de plusieurs non-résidents au Canada pendant une période prolongée. Personne ne sait combien de temps resteront en vigueur ces restrictions de voyage et les directives décrites ci-dessous, qui s’appliquent du 16 mars au 29 juin 2020, pourraient être prolongées par l’ARC au besoin.

Résidence réputée : règle des 183 jours

L’assujettissement d’un individu à l’impôt canadien est fonction de sa résidence fiscale, situation qui demeure essentiellement une question de fait tranchée selon des critères de rattachement établis par la common law. Par contre, et sous réserve de toute convention fiscale applicable, un non-résident qui, dans une année civile, séjourne au Canada plus de 183 jours est réputé être un résident fiscal canadien pour l’année entière et il devient donc assujetti à l’impôt canadien sur son revenu de source mondiale.

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Update on the Status of the Multilateral Instrument in Canada

On June 21, 2019, one year after it was tabled in the House of Commons, Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting, received Royal Assent and became law. By way of background, Canada had signed the Multilateral Instrument (the “MLI”) on June 7, 2017 and had then announced its intention to adopt the minimum standards proposed by the Organisation for Economic Co-operation and Development (the “OECD”) under the Base Erosion and Profit Shifting project, as well as mandatory arbitration for tax treaty disputes.

The next step for Canada is to notify the OECD through the deposit of its instrument of ratification which is likely to be done before the end of the year. The MLI will then enter into force for Canada on the first day of the month following the expiration of a three-month period from the date of notice to the OECD. For example, if the notice is sent in October 2019, the MLI will enter into force for Canada on February 1, 2020.

The MLI provisions on withholding tax will then take effect between Canada and a treaty partner where the MLI is already in force on the first day of the next calendar year, i.e. January 1, 2021. For other taxes, such as the capital gains tax on shares meeting the real property asset valuation threshold (discussed below), the MLI will have effect for the taxable periods beginning after a six month period (or a shorter period if the contracting states notify the OECD that they intend to apply such a period), i.e. for the taxable periods beginning August 1, 2020.

As of July 4, 2019, out of the 89 countries who signed the MLI, 29 have deposited their instrument of ratification with the OECD, including Australia, Finland, France, India, Ireland, Luxemburg, Japan, the Netherlands, New Zealand, Sweden and the United Kingdom.

As indicated, Bill C-82 confirms the adoption of the minimum standards, along with other measures for which Canada had initially registered a reservation, including the two following measures which are noteworthy.

1. MLI – Article 8, paragraph 1: Dividend Transfer Transactions

Most tax treaties signed by Canada call for a reduction in the domestic withholding tax rate on dividends from 25% to 5% when the beneficial owner of the dividends is a corporation subject to corporate tax in the contracting jurisdiction that directly or indirectly holds at least 10% of the voting rights (and, in some cases, of the capital) of the Canadian corporation paying the dividend. Fulfillment of the 10% ownership test is determined when the dividend is paid.

By adopting the restriction described in paragraph 1 of Article 8 of the MLI, Canada agrees to apply the reduced withholding tax rate of 5% only if shares granting voting rights (and capital, where applicable) of at least 10% are owned throughout a 365-day period, including the day on which the dividend is paid. For the purpose of computing that period, no account shall be taken of changes of ownership that are a direct result of a corporate reorganisation, such as a merger or divisive reorganisation, of the corporation that holds the shares or the Canadian corporation that pays the dividend. This amendment will block surplus exit planning strategies where the shareholding of a Canadian corporation was modified within days prior to the payment of a dividend, which was generally easy to achieve from a Canadian tax perspective as the gain on the sale of the shares of a Canadian corporation is not taxable unless more than 50% of the value of the shares is derived directly or indirectly from real or immovable property, resource property or timber resource property situated in Canada.

2. MLI – Article 9, paragraph 1: Capital Gains from Alienation of Shares or Interests of Entities Deriving Their Value Principally from Immovable Property

Canadian domestic law stipulates a five-year test to determine taxation of a capital gain from disposition of shares or other interests in entities whose value is or was mainly (i.e. more than 50%) derived from immovable property in Canada. Thus, if, at any time during this 60-month period ending on the date of disposition of the shares, more than 50% of their value was derived directly or indirectly from an immovable property located in Canada, the capital gain from the disposition is taxable in Canada. In comparison, most tax treaties signed by Canada do not include a retroactive test. In fact, the value test is generally applied at the time of disposition. It was therefore possible, subject to the general anti-avoidance rule, to proceed with an asset “stuffing” to decrease the relative value of the immovable property in Canada below the 50% threshold before the sale.

With paragraph 1 of Article 9 of the MLI, Canada is adopting a one-year retroactive look back, i.e. Canada is reserving the right to tax the capital gain if the 50% value threshold is exceeded at any time during the 365 days preceding the disposition.


Le processus d’adoption de l’IM est enclenché

Alain Ranger pratique depuis plus de 30 ans en droit fiscal, plus spécialement en droit fiscal lié au droit des sociétés et au droit des affaires. Au cours des années, Alain a développé une expertise reconnue dans une variété de domaines dont les fusions et acquisitions, les transactions transfrontalières, les réorganisations d’entreprises, les investissements étrangers, les financements structurés et la fiscalité des sociétés. Le 28 mai dernier, le ministre des Finances du Canada a déposé à la Chambre des communes un avis de motion de voies et moyens (l’« Avis ») officialisant ainsi l’intention du Canada de présenter un projet de loi pour mettre en oeuvre les propositions retenues de la Convention multilatérale pour la mise en œuvre des mesures relatives aux conventions fiscales pour prévenir l’érosion de la base d’imposition et le transfert de bénéfices (l’« IM »). L’Avis a été adopté par les parlementaires le 21 juin et le projet de loi a ainsi franchi l’étape de la première lecture à la Chambre des communes.

Pour fins de rappel, le Canada était l’un des signataires de l’IM le 7 juin 2017 et il avait alors annoncé son intention d’adopter les normes minimales proposées par l’OCDE dans le cadre des propositions BEPS ainsi que l’arbitrage obligatoire lié aux différends dans les conventions fiscales. L’Avis prévoit donc l’adoption de ces normes minimales, ainsi que d’autres mesures à l’égard desquelles le Canada avait initialement réservé sa position.

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