Category Archives: Canada

Canada

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.

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Analysis, Canada

Proposed Legislative Changes to the Taxation of Employee Stock Options in Canada

In the 2019 Federal Budget, the Canadian government outlined its proposal to introduce a $200,000 annual limit on employee stock option grants for employees of “large, long-established, mature firms”. The government takes the view that the current regime of preferential tax treatment for employee stock options does not help to achieve the policy objective of supporting younger and growing Canadian businesses, but instead, disproportionally benefits executives of large, mature companies who take advantage of the rules as a preferred form of compensation. 

In an effort to provide further clarifications to the proposed new stock options rules, the Department of Finance released a Notice of Ways and Means Motionon June 17, 2019.

Current Regime

Under the current stock option rules, pursuant to subsection 7(1) of the Income Tax Act (Canada) (the “Act”), at the time when employee stock options are exercised by an employee, a taxable benefit is added to the employee’s taxable income to the extent the fair market value (“FMV”) of the underlying shares exceeds the exercise price specified in the option agreement. However, provided that at the time of the grant, the options are not in-the-money (i.e. exercise price is not less than FMV) and, generally, common shares are issued upon the exercise of the options, the employee is entitled to claim a deduction under paragraph 110(1)(d) in the amount of 50% of the taxable benefit determined under subsection 7(1).

New Proposed Amendments

The new draft legislative proposals, if enacted as proposed, would impose a $200,000 annual vesting limit on employee stock option grants (based on the fair market value of the underlying shares at the time the options are granted) that could be entitled to receive the 50% deduction allowed under paragraph 110(1)(d). 

Under the new regime, a vesting year in respect of an option agreement is determined by either: (i) the calendar year in which the employee is first able to exercise his or her option as specified in the option agreement; or (ii) if the option agreement does not specify a vesting time, the first calendar year in which the option can reasonably be expected to be exercised.

The new annual vesting limit would not apply to employee stock options granted by “specified persons” as defined in the Act to mean: (i) Canadian-controlled private corporations (“CCPCs”); and (ii) non-CCPCs that meet certain prescribed conditions (yet to be released).

In addition, the new draft legislative proposals introduce a tax deduction for an employer who enters into an option agreement with its employee to grant non-qualified securities. The amount of deductions the employer is entitled to claim against its taxable income for a taxation year would be equal to the amount of taxable benefit its employees realize under subsection 7(1) in respect of non-qualified securities.

An employer would be entitled to claim such deductions under circumstances where the following conditions are met: (i) at the time of entering into the agreement, the employer notifies the employee in writing that the security is a non-qualified security; (ii) the employer notifies the Minister of National Revenue that the security is a non-qualified security in prescribed form filed with the employer’s income tax return in the year the agreement is entered into; and (iii) the employer is a specified person and the employees would have otherwise been entitled to claim the deduction under paragraph 110(1)(d).

In order to be entitled to claim the tax deduction, it is critical that the employer designates the options that would have otherwise qualified for a deduction under paragraph 110(1)(d) as non-qualified securities by specifying this in the option agreement.

The new draft legislative proposals will apply to employee stock options granted on or after January 1, 2020.

The federal government is currently seeking input on the characteristics of companies that should be considered “start-up, emerging, and scale-up companies” for purposes of the prescribed conditions as well as views on the administrative and compliance implications associated with putting such characteristics into legislation. Submissions of any comments with respect to the prescribed conditions for the consideration by the Department of Finance are due on September 16, 2019.

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Quebec

La vérification fiscale – Le rôle du professionnel

Au Québec, annuellement, l’Agence du revenu du Québec (« L’Agence ») émet plus de 1 100 000 avis de nouvelle cotisation. De ce nombre, seulement 5 à 6 % sont émis à la suite d’une vérification fiscale. À cela s’ajoute également les actions de l’Agence du revenu du Canada. Malgré ce petit nombre, la complexité et les impacts possibles de ce type de dossiers m’incitent à conseiller fortement aux entrepreneurs québécois de ne pas hésiter à consulter rapidement leurs professionnels du domaine de la fiscalité afin que ces derniers s’assurent du respect de leurs droits. Le rôle du professionnel qui accompagne son client tout au long du processus de vérification et de la contestation de l’avis de cotisation à être éventuellement émis est crucial.

La Loi sur l’administration fiscale, loi qui gouverne les obligations des contribuables québécois et les pouvoirs de l’Agence, établit que celle-ci peut procéder à une vérification fiscale et le contribuable visé doit prêter assistance à l’employé désigné[1]. Le rôle du professionnel, dans l’accompagnement de son client, est de s’assurer du respect des droits de celui-ci dans ce processus.

Le plus grand des impairs que commettent certains professionnels est d’établir un lien de confrontation dès le départ avec le vérificateur plutôt qu’un lien de collaboration. Il importe de savoir qu’avec ou sans la collaboration du professionnel et celle de son client, l’Agence procédera à sa vérification fiscale et éventuellement, à l’émission d’avis de cotisation. Fort de mon expérience de plus de 14 ans au sein du contentieux de l’Agence et maintenant 2 ans à la défense des intérêts des contribuables, mon constat est que le plus grand perdant, lorsque cette attitude est adoptée, est le contribuable lui-même. Cependant, « collaboration » ne veut pas dire tout donner, sans limite ni discussion.

Le premier rôle du professionnel consiste notamment à déterminer avec le vérificateur désigné l’objet de la vérification, la période initialement visée et la durée estimée de la vérification. Revenu Québec écrit d’ailleurs ceci au sujet des droits et obligations d’un contribuable qui fait l’objet d’une vérification fiscale :

« Vous avez droit à des renseignements exacts, complets, compréhensibles et accessibles. Nous (Revenu Québec) agissons avec transparence et vous informons des étapes que nous suivons lorsque nous travaillons avec vous. Nous sommes en mesure de vous fournir une explication claire en ce qui concerne chacune de nos demandes et de nos décisions. »[2]

C’est ainsi que l’Agence doit expliquer les demandes formulées d’information et de documents. Il n’y a pas place à une « partie de pêche » non plus qu’il n’y a place à une « guerre de tranchées ». Le professionnalisme doit prendre le dessus sur les émotions créées par l’intrusion désagréable d’une vérification fiscale. d’un côté comme de l’autre.

Lorsque le vérificateur complète son travail de vérification et conclut qu’un avis de cotisation sera émis, il devrait soumettre, au préalable, un projet de cotisation. C’est à ce moment qu’il doit présenter et expliquer les modifications qu’il entend apporter, tout en donnant les justifications nécessaires. Il faut alors écouter, prendre des notes et rester calme. Ce n’est pas le moment de tirer sur le messager. Au contraire, le professionnel aura droit à un délai afin de présenter sa position et d’établir le bien-fondé ou non des points litigieux avant qu’un nouvel avis de cotisation ne soit émis.

Le rôle de négociateur prend alors toute son importance. Son devoir est de s’assurer, le cas échéant, que son client n’assume que ses réelles obligations fiscales en application des lois et règlements. C’est le temps d’user de flair, de déterminer l’ouverture à la discussion et de bien choisir ses batailles. À cet égard, ce n’est pas seulement pour le bénéfice du client, mais également pour la crédibilité du professionnel. Croyez-moi, les professionnels ont beaucoup plus à perdre en agissant de manière belliqueuse que de manière harmonieuse.

Si, malgré toute la qualité de la représentation et des arguments soulevés, l’Agence émet un avis de nouvelle cotisation, le contribuable bénéficie d’un délai pour le contester suivant la forme et les formulaires fiscaux prescrits. J’aborderai ce sujet au cours d’un prochain texte.

Tout au long de ce processus de vérification, il ne faut jamais hésiter à faire appel aux services d’avocats spécialisés en litige fiscal. Malgré que ce ne soit pas la majorité des dossiers de vérification qui seront contestés auprès de la direction des oppositions, encore moins devant les tribunaux compétents, il n’en demeure pas moins qu’une stratégie globale constitue souvent la meilleure arme. La juxtaposition des connaissances comptables, fiscales et légales constitue certainement un des meilleurs atouts à une argumentation post-projet de cotisation. De plus, les informations discutées en cours de mandat se trouvent protégées par le secret professionnel conféré à la relation client-avocat[3]. Cette protection n’est pas sans importance.

Mes années passées à défendre les intérêts de l’Agence devant les différentes instances judiciaires me donnent une connaissance précise sur l’organisation, son fonctionnement et les manières d’agir et de faire. N’hésitez pas à prendre contact avec moi dès le début du processus de vérification. L’expérience et l’expertise acquises au fil du temps dans ce genre de mandat aideront nécessairement les contribuables dans la défense de leurs intérêts.

[1] Article 38, Loi sur l’administration fiscale, RLRQ, c. A-6.002. Voir aussi l’arrêt de principe sur le sujet R.c. McKinlay Transport ltd [1990] 1 R.C.S. 627

[2] Document : Vos droits et vos obligations à l’égard d’une vérification fiscale, page 2 (site internet de Revenu Québec).

[3] L’article 46 de la Loi sur l’administration fiscalelimite la protection du secret professionnel aux avocats et notaires, excluant implicitement les comptables.

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Analysis, Canada

Taxation of the Global Digital Economy

On January 29, 2019 the OECD announced that the OECD/G20 Inclusive Framework on BEPS has made important steps towards addressing tax challenges associated with the digitalisation of the global economy, committing to deliver a progress report to the G20 Finance Ministers in June 2019 and to release a long-term solution in 2020.

Background

The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project consists of 15 discrete action areas, which target gaps in the international tax system that enable the shifting of profits away from the jurisdiction of the underlying economic activity. Action 1 of the BEPS Project is focused on tax challenges associated with digitalisation.

The Task Force on the Digital Economy (TFDE), with participation from more than 45 countries including all OECD and G20 members, was established to carry out the work of Action 1.

The TFDE developed the 2015 BEPS Action 1 Report, Addressing the Tax Challenges of the Digital Economy (the “Action 1 Report”),[1] which was released in October 2015 as part of the full BEPS Package and was endorsed by the G20 Leaders in November 2015.

Following the release of the BEPS Package in October 2015, the OECD/G20 Inclusive Framework on BEPS (“Inclusive Framework”) was established in June 2016. The Inclusive Framework includes 125 countries and jurisdictions brought together to collaborate on the implementation of the BEPS Package. Upon the establishment of the Inclusive Framework, the mandate of the TFDE was extended to include the delivery of an interim report by 2018 and a final report in 2020.

In March 2018, the Inclusive Framework delivered its Interim Report, which provided analysis but no conclusions regarding the tax challenges of the digital economy. 

Tax Challenges of the Digitalised Economy

The tax challenges recognized in Action 1 Report and the Interim Report include the questions:

  • where tax should be paid and in what amount in a world where businesses can be heavily involved in the economy of different jurisdictions without any material physical presence;
  • how enterprises in the digital economy add value and make their profits;
  • how transfer pricing rules should account for intangible value drivers such as branding and innovation;
  • how the digital economy relates to the concepts of source and residence; and
  • how to address BEPS risks exacerbated by the digitalising economy.

The Policy Note

In January 2019, the Inclusive Framework produced a Policy Note, which sets out that renewed international discussions on the digitalisation of the economy will focus on two central pillars: (i) problems raised directly by digitalisation; and (ii) general BEPS problems exacerbated by digitalisation.

The first pillar will focus on how the existing rules dividing up the right to tax the income of multinational enterprises among jurisdictions could be modified to address the challenges of digitalisation.

Under the first pillar, the Policy Note identifies that proposed approaches require reconsidering current transfer pricing rules, going beyond the arm’s length principle, and abandoning the idea that taxing rights must be determined by reference to a physical presence.  In addition, the Policy Note indicates that new ideas about profit attribution and nexus may need to be developed, and that doing so could require changes to tax treaties and changes to the permanent establishment threshold.

The second pillar will focus on how to resolve remaining BEPS issues not directly associated with digitalisation, recognizing that features of the digitalised economy exacerbate more general BEPS issues.

Commentary

The following are concerns and questions which any solution to the digitalisation of the global economy will be required to face.

How far?

There is no doubt that digitalisation has created substantial changes to the global economy and that traditional taxation rules need to be reconsidered. However, how far this reconsideration should go remains a question.

Transfer Pricing without the arm’s length principle?

It is unclear how to develop rules that don’t rely on the arm’s length principle or how this shift away from a core element of traditional transfer pricing could be justified.

Transfer Pricing without the concept of permanent establishment?

Additionally, how could taxing rights be determined without reference to physical presence, and under what authority could such rights be exercised? Once physical presence is removed as a threshold, what would prevent a jurisdiction from taxing everyone everywhere?

Is Consensus Possible?

An important element of the OECD’s pending solution is that it is to be “consensus-based”, which is a tall order especially given the diverse interests at stake. It is difficult to imagine how the required consensus could be formed where the participating jurisdictions have such divergent interests.

Relation to Unilateral Efforts

How will a solution to the challenges of the digital economy operate with the various unilateral efforts that are emerging?

The Traditional Approach is Still Required

There will not be a purely digital economy so any new rules will have to be appropriate to both a digital and a traditional economy. 

With respect to the tax challenges of digitalisation, members of the Inclusive Framework renewed their commitment to reaching a long-term solution by 2020, and have agreed to deliver an update to the G20 Finance Ministers in June 2019.  With so many questions and such a complicated mandate, it will be impressive if the Inclusive Framework is able to report on meaningful progress before the deadline.

Up Next

In March 2019, the OECD held a public consultation and invited submissions from stakeholders on potential solutions to the tax challenges arising from the digital economy. Despite the limited timeframe, approximately 200 comments were received, some referring to the proposed solutions as “draconian” and other suggesting solutions should go further and make the tax base as “broad as possible”. Stay tuned for more details on the consultation process and results.

[1]       OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241046-en

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Analysis, Canada, Français, Quebec

Cotisation par mouvement de trésorerie : « On n’utilise pas un canon pour tuer une mouche »

 

Dans une décision récente de la Cour du Québec (Dion c. l’Agence du revenu du Québec, 2018 QCCQ 10280), division des petites créances, l’honorable Juge Dortélus réitère à l’Agence du revenu Québec (« Revenu Québec ») l’importance d’appliquer les méthodes estimatives avec rigueur, sans excès ni exagération.

Dans cette affaire, Revenu Québec a utilisé la méthode estimative mouvement de trésorerie afin d’ajouter des revenus présumés non déclarés à Mme Dion pour les années d’imposition 2006, 2007 et 2008.

Initialement, le dossier de Mme Dion avait été sélectionné pour vérification dans le cadre du projet organisationnel de lutte contre l’évasion fiscale selon les « Indices de richesse ». Dans le cas particulier de Mme Dion, les indices de richesse qui avaient attiré l’attention de Revenu Québec étaient qu’elle était propriétaire d’un immeuble ayant une valeur de 352 400$ et propriétaire d’un véhicule ayant une valeur de 30 366$, ce qui, selon les propos du juge, est « une hypothèse très mince d’indices de richesse ».

Le Juge Dortélus réitère à Revenu Québec l’importance de prendre en considération la réalité du contribuable, mais aussi d’analyser sérieusement les motifs de contestation de celui-ci lorsqu’il y a utilisation par les autorités fiscales d’une méthode estimative :

[39] Lorsque cette méthode indirecte de cotisation est appliquée, on doit tenir compte de la situation réelle du contribuable qui connaît et possède des renseignements dont le l’ARQ ne dispose pas. On ne doit pas écarter sans motif valable ces renseignements, ce qui semble avoir été le cas dans la situation ou Mme Dion.

Dans le cadre de l’audience, Mme Dion soulève que les revenus ajoutés suivant la vérification ne sont pas des revenus, en démontrant, entre autres, qu’un montant traité comme une augmentation de placement par Revenu Québec était en fait des sommes provenant de ses comptes bancaires.

De plus, Mme Dion conteste le calcul du coût de vie effectuée par Revenu Québec selon les données de Statistiques Canada, puisque celui-ci ne reflète pas sa situation réelle. Mme Dion a démontré lors de l’audience que son coût de vie réel était jusqu’à trois fois moindre que celui calculé par Revenu Québec.

Finalement, le Juge Dortélus rappelle qu’un contribuable continue de bénéficier de la présomption de bonne foi prévue à l’article 2805 du Code civil du Québec, et ce, même s’il fait l’objet d’une vérification selon une méthode estimative. À cet effet, il précise que cette présomption légale n’est pas renversée par la seule présence d’indices de richesse qui pourraient mener les autorités fiscales à soupçonner qu’un contribuable n’aurait pas déclaré l’ensemble de ses revenus.

Dans le cadre de l’audience, Mme Dion a été en mesure de démontrer la non-fiabilité de la méthode utilisée par Revenu Québec et que le calcul du coût de vie ne tenait pas compte de sa réalité. Son appel a donc été accueilli et les avis de cotisation ont été annulés.

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