The COVID-19 pandemic has created many changes for corporate management throughout Canada. In the past, directors often traveled outside of Canada for purposes of attending board meetings in foreign jurisdictions. Directors often made such travel arrangements in order to maintain a corporation’s residency outside of Canada for tax purposes. However, the ongoing COVID-19 pandemic has significantly restricted directors’ abilities to travel abroad and, in turn, attend meetings in foreign jurisdictions.
Directors have, in response, created alternative local or “virtual” arrangements (i.e. video or teleconferencing) for such meetings. However, these arrangements may have potentially significant income tax consequences for a corporate taxpayer. This bulletin will briefly address some of these consequences:
General Principles of Residency
The Income Tax Act (Canada) (the “ITA”) imposes tax on corporations resident in Canada. The Courts generally determine a corporation’s residency by applying the common law test of “central management and control”. The test provides that a corporation is resident in the country where its central management and control is exercised. This is generally the country where the directors of the corporation exercise their responsibilities. It should also be noted that a corporation may be resident in one or more different countries (e.g. the directors may be exercising their responsibilities in multiple different countries).
On March 18, 2020, the Canadian government announced economic measures to help stabilize the Canadian economy in response to the COVID-19 pandemic. These measures are intended to provide up to $27 billion in direct support to Canadian workers and businesses. This newsflash will provide a brief summary of the key tax measures that were included with this announcement. Similar measures were announced on March 17, 2020 by the Quebec government. Fasken commentary on the Quebec measures can also be found on our website.
Tax Return Filing Deadlines
With 2019 tax return filing deadlines approaching, the Canada Revenue Agency (“CRA”) will defer the filing due date for the 2019 tax returns of individuals, including certain trusts. For certain individuals (other than trusts), the return filing due date will be deferred from April 30 until June 1, 2020. Self-employed individuals (and their spouses) are unaffected by these measures as the filing due date for 2019 tax returns remains June 15, 2020.
For trusts having a taxation year ending on December 31, 2019, the return filing due date will be extended from March 30, 2020 to May 1, 2020.
Upcoming Income Tax Liabilities
CRA will permit all taxpayers (including businesses) to defer, until after August 31, 2020, the payment of any amounts on account their income tax liabilities that become owing on or after March 18, 2020 and before September, 2020. This relief applies to income tax balances due, as well as instalments on account of such taxes. CRA will not charge interest or penalties on these amounts during this period.
It should be noted that the timing of payment of other Canadian taxes including GST/HST, payroll taxes and non-resident withholding taxes are not deferred.
Suspension of Audit Activity
CRA will not contact any small or medium businesses to initiate any post assessment GST/HST or income tax audits for the next four weeks (ending April 15, 2020) and the CRA will temporarily suspend audit interaction with taxpayers and representatives for the “vast majority of businesses”.
Other Tax Proposals
Unlike the administrative relief described above, some of the measures announced require Parliamentary approval. The Canadian government has proposed to provide a special payment by early May 2020 through the Goods and Services Tax credit (“GSTC”). The proposal is to double the maximum annual GSTC payment amounts for the 2019-20 benefit year. The Minister of Finance (Canada) estimates that the average increase to income for those benefiting from this measure will be approximately $400 for single individuals and nearly $600 for couples.
The Canadian government is also proposing to increase the maximum annual Canada Child Benefit (“CCB”) payment amounts for the 2019-20 benefit year by $300 per child.
Finally, these measures contain a proposal to provide “eligible small employers” a wage subsidy for a period of three months. The announcement states that eligible small employers will include corporations eligible for the small business deduction, as well as non-profit organizations and charities but provides no further specifics. The proposed subsidy is to be equal to 10% of remuneration paid during that period, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. The announcement does not stipulate when the three month period will begin but provides that eligible businesses will be able to deduct the amount of such subsidy from the income tax withholdings that they would otherwise remit in respect of their employees’ remuneration.
Canada’s prime minister indicated that all of the major political parties in Parliament support these measures and will likely reconvene Parliament to approve them in the coming days.
On May 28, 2018, nearly a year after Canada became a signatory to the OECD’s Multilateral Instrument (“MLI”), a notice of ways & means motion has been tabled by the Minister of Finance (Canada) in the House of Commons signalling the Canadian government’s intention to introduce legislation to ratify the MLI. On June 20, 2018, Bill C-82, which will enact the MLI, received first reading in the House of Commons. The MLI has been signed by 78 countries including Canada.
When the MLI is ratified by Canada and the other signatories, existing bilateral tax treaties may be modified to apply certain agreed to minimum standards on treaty abuse and improving dispute resolution that were endorsed by participating countries under the OECD /G20 Base Erosion and Profit Shifting (BEPS) Project.
Solicitor-client privilege is a constitutionally-entrenched right that protects communications between a lawyer and his or her client. The foundation of such privilege is to encourage full and frank disclosure between lawyers and their clients for the purpose of providing legal advice. A lawyer cannot be compelled to disclose information shared by his or her client and only the client can waive privilege. In the tax planning context, protecting the confidentiality of taxpayer information is important to ensure that a taxpayer’s tax position is not unfairly prejudiced by legal requirements to provide subjective analysis or information to taxing authorities where such analysis or information was communicated or created for purposes of providing tax advice. Further, to better ensure taxpayer compliance under a self-reporting tax system, the confidentiality of communications with one’s tax lawyer is protected to encourage full and complete disclosure of the facts necessary to provide tax advice.
Transfer pricing issues continue to be an important focus for multinational enterprises (“MNEs”) and tax authorities. This post summarizes some of the significant developments in Canada that have arisen so far in 2016 and what to look forward to in the coming months. In particular, we highlight a decision of the Federal Court of Appeal, Canada’s implementation of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and some significant transfer pricing cases that are working their way through the Tax Court of Canada. Continue Reading »