International Taxation
Me. Paul Setlawke (Winter 1999)
by Trent Mell
Notional Individual 1
ITA Answers 2
1. Part XIII - Withholding Tax 2
2. Part I - Income Tax 2
Residence 2
R. v. Gurd’s 2
Special Rules on Residence 3
Residents 4
Chapter 2: Employee & Individual Tax Problems 5
Hale 5
Hewitt 5
Ch. 3: Non-Residents with Canadian Business Operation 6
Sunbeam Corporation 7
Panther Oil 7
Canadian Enterprise - p. 30 7
GST 7
Other tests (p. 31) 7
Services - test of performance 7
Note (Drew): under a tax treaty need 7
Permanent Establishment Cases 7
1. Dudney v. The Queen [1988] T.C.C. 7
2. Cudd Pressure Control [1998] F.C.A. 7
Partnership 7
Use of agents (32) 7
Distributorship 8
Pullman: 8
Carrying on a Business Cases 8
1. Gurd’s [1985] F.C.A. 8
2. Capital Life Insurance [1986] F.C.A. 8
3. Sudden Valley [1976] F.C.A. 8
IV. Consequences of NR Carrying on a Business in Canada 8
V. NR Utilizing a Canadian Subsidiary (p. 39) 8
ch. 4 - Real Property 10
Trust 11
Ch. 5 Non-Resident Withholding Tax 13
Nestle Enterprises Ltd v. MNR [1991] 13
Types of payments 13
s. 212 (a) Management fees 13
s. 212(1)(b) - Interest 14
s. 212(1)(c) - Estate of Trust Income 14
s. 212(1)(d) - Rent, Royalties, etc. 14
212(2) - Dividends 14
s. 212.1 - Anti-avoidance rule against “surplus stripping” 15
NROs - Non-resident owned investment corporations 15
Ch. 6 - Withholding Tax on Interest 17
Chapter VII: Canadians doing business abroad - Foreign Tax Credit 19
126(1) - Non-business income tax 19
126(2) - Business income tax 19
FTC 19
3 Possible Systems 19
126(7) - non-business income tax defn 19
126(7) - business income tax 19
126(1) - FT deduction 19
95(1) - Foreign affiliate defn 19
Section 17 - Loan to NR 20
Setlawke Structure: 20
Above structure will be look at to study 3 different issues: 21
Norway loan 21
Transfer Pricing - example 1 21
Transfer Pricing - example 2 21
Conclusion: 21
Paper Remarks 21
Ch. 8 - F.A.P.I. (ss. 90-95) 22
Purpose 22
Levels of FAPI taxation: 22
1. Non Foreign Affiliate 22
2. Foreign Affiliate 22
3. Controlled Foreign Affiliate 23
91(1) Amounts included from FA 23
1. 95(1) defn of FA 23
2. 95(1) defn of CFA 23
Ludmer Case (’76) 23
3. 95(1) defn of FAPI 23
95(1) Defn of active business of a FA 24
95(1) Defn of income from an active business 24
Inter-affiliate payments 24
Note on IBC 25
ANALYSIS 25
Definitions - 5907(1) 26
94.1 27
ch. 10 - Foreign Affiliate Share Exchange & Mergers 28
Domestic Transactions 28
FA Transactions 28
s. 85.1(3) 28
95(2)(c) 29
95(2)(d) - Foreign merger 30
Ch. 11 - Offshore Trusts 31
94(1) - re offshore trusts 31
XII. Avoidance & Evasion 33
Golden case, SCC 33
New developments since book put together: 3 new cases. 33
Evasion v. Avoidance 33
Redpath (141) 33
Myers (141) 33
Stubart 33
Newman 34
Shell (Kiwi) 34
Tax Planning v. Tax Avoidance (144) 34
GARR - s. 245 34
1) McNicholl, Tax Ct 35
2) Equilease 35
Held: 35
3) Nadeau 35
Note to Reader:
What follows are unedited class notes. Beware of possible errors – I’ve been known to make a few!
Other Sources:
§ Stikeman Bulletins
§ Matthew Bender
§ Canadian Tax Foundation Annual Reports
§ Tax Journals
§ Michael Edwards Carr on interp of tax treaties
What’s international tax
§ Capital / profit / people moving between countries
§ Domestic law on the interaction between countries
§ Claims enforced domestically
Citizenship / Domicile / Residence
§ C:
§ D: Where you intend to be
§ R: Where you are
How should a country tax?
§ Canada & most countries - by Residence
§ US - by Citizenship
§ born in Canada to a parent who is a US citizen: taxable in Canada & US
§ Result: double taxation or pay in one or the other
Domicile
§ Not relevant in Cda
§ Is relevant in the US for gift tax & estate tax purposes
Corporations
§ Determine R; deemed R provisions, CL test…
Taxable entities (Cda: 1-3)
1. Individuals
2. Corporations
3. Trusts
4. Partnerships
5. Foundations
6. Stiching
7. Stiftugn
Notional Individual
A. Domestic sources of Income
1. Interest
2. CG
3. Business Income
§ Gifts - Not taxed in Cda but in most countries
§ Wealth taxed in France
B. Foreign sources of income
§ Should there be tax on income earned outside Cda
C. Corp in BVI
§ Should there be tax on income earned from a foreign income
§ Have to, otherwise tax avoidance encouraged
§ Tax the indiv or the corp? If tax per control, what if it’s split btw 3 countries?
Point: Each country has own mindset - each distinct
ITA Answers
1. Part XIII - Withholding Tax
§ s. 212 - 25% tax on non-residents for passive income paid by Canadian resident
§ interest, dividends, royalties, rent, trust distributions
§ Is Bombardier’s interest payment on money borrowed in Europe subject to tax?
§ No, can’t be what s. 212 means.
§ Many exceptions to the provision
§ Interest in particular (212(1)(b)(7) - Bombardier)
§ Tax treaties
2. Part I - Income Tax
s. 2 - how R & NR are taxed & on what
§ Simple to read but key to whole ITA
2(1) - IT paid on all taxable income earned by a resident
§ Cdn basis: world income of residence
§ Similar in US, UK but not Hong Kong
2(3) - NR will pay taxes where
(a) Employed in Cda
(b) Carried on business in Cda
(c) Disposed of a taxable Cdn property (TCP)
Steps on treatment of income:
1. R or NR
2. 2(1) or 2(3)
3. s. 212 withholding tax
4. Does a Tax Treaty change the ITA provision (relief)
Residence
250(1) - Deemed Resident for the whole tax year where:
(a) sojourned in Cda for 183 days or more
(b) Cdn Forces
(c) Ambassador, minister, officer… and resident immediately prior to appointment
(d) Performed services in another country under a prescribed program of the govt. of Cda (CIDA projects listed under ITA Regulations)
(d.1) Cdn forces school staff
(e) R in Cda in a previous year and a spouse of a person under (b), (c), (d), (d.1)
§ Proposed amendment, 1998: Where a family ceases to be factually R in Cda (factually, common law rules; outside s. 251), the spouse of a person under (b), (c), (d), (d.1) will only be treated as a R if not taxed in new country because of a tax treaty. Point: if already taxed, Cda will not also tax.
(f) Child..
250(4) Deemed R for corps where
(a) Incorporated in Cda after April 26, 1965
§ Keep in mind CL rules (Central mind & mgmt)
(b) …
(c) Incorporated in Cda before April 27, 1965, if they carried on business in Cda they will be deemed R
§ See R. v. Gurd’s
Per notes to s. 250(4), CL test must be considered in addition to this subsection
R. v. Gurd’s
§ U.S. Co. selling Crush in Iran until the Shaw is overthrown
§ Want to use a Cdn co. to sell without paying Cdn taxes
§ Want a Cdn co. formed in Cda before April 27, 1965 to sell Crush in Iran
§ To escape CL test: Have a majority U.S. Directors & meetings in the U.S.
Steps to avoid deeming provisions:
§ Make sure that since ’65, Gurd’s was an inactive company
§ Make sure the co. is not “carrying on business in Cda” in the process
Look at:
1. What does it mean to “Carry on business in Canada”?
§ Cdn mailing address relevant? Literal (technical) or purposive (spirit) approach?
2. How a company used tax law to structure this deal
3. Judicial attitude to this type of planning
Foreign Accrual Property Income (FAPI) Rules
§ Rules for the taxation of income earned by foreign corporations
§ Purpose: Prevents Cdn R from setting up a controlled foreign affiliate (CFA) to earn interest income.
Residence - Continuation
§ Continuation: provisions to allow a corp to continue in another jurisdiction
§ International or interprov continuation: law changed & now deemed to have been incorporate on the date of continuation
Special Rules on Residence
1. 250(6) - Int’l Shipping Company
§ BVI company are not deemed residents
§ Goal: attract Hong Kong residents to Cda by exempting int’l shipping revenues from taxation (but taxed on other income, was thus ineffective)
2. Cdn Co owns US co with 5 Cdn Directors
§ Both countries will deem the subsidiary to be resident
§ US: tie-braker rules
§ See notes
3. Trusts
§ Generally resident where the trustees reside
§ Bermuda trust with Bermuda trustees are NR
§ FAPI rules extend to trusts however, thus NR doesn’t mean not taxed
4. s. 114 - when become a resident part way through the year
Point: Rules to determine who is R and NR. Other rules to determine who is taxable & who is not.
Friday, January 15
Sources
1. ITA
2. Income Conventions Interpretations Acts
3. Treaties (modeled on OECD or UN conventions)
§ UN more fore treaties between developing & developed countries
4. Jurisprudence
5. Vienna law
§ Each treaty overrides the ITA, providing the opportunity for overlap. Does an extended definition of interest under the ITA apply to the treaty as well? What if the ITA is amended after the treaty is passed.
Residents Non-Residents
Taxed on world income: Part I (Income Tax):
§ c.g. 1 - employees
§ interest business income 2 - carrying on business
§ foreign income 3 - taxable Canadian property
§ direct
§ through FA & CFA Part XIII:
- Withholding Tax
Part XIV:
- Branch Tax
Residents
Individual Corporation Trust
1. Common law rule
- Person’s presence - Control & Management - Residence of trustee (Thibodeau)
2. Deemed Residence
- 183 days - Formed in Canada - na
- Govt. employee - 94(1)(c): taxation of NR trusts
3. Deemed Not Resident
- Dual residence - International Ship Co.
- U.S. Tie Brake
Scenario A: Trust with trustee of Isle of Man Co., which has 4 Directors from 4 different countries. May meet by phone. Where is the trust resident?
Scenario B: Canadian wants to move to the U.S. Becoming a NR to Canada = departure tax. If 7 months in U.S. but has not severed ties in Canada, remain a resident in Canada…
§ See Canada-US tax treaty (p. 2604), Art IV; Tie-breaker rules at par. 2: where is the TP’s “centre of vital interests”
§ Thus deemed resident in US for purposes of the treaty but still R of Canada under the ITA (ie: departure tax still doesn’t apply)
§ If TP wants to sell shares, what are the tax consequences? Art. XIII:4 (p. 2636): … Starting point: dual resident, deemed US resident for purposes of the treaty. XIII:4 says he will be taxed only in the US.
§ Based on this simple reasoning, could have a huge Canadian gain, move to the US & thus not pay tax. The thinking was that there would be tax upon sale, not upon departure (preserve the right to tax for 5 years - the US can tax instead). Rev. Canada. proposed an amendment at s. 250 (see text - grey box) that deems TP to be NR for purposes of the ITA. Therefore, departure tax arises.
(Critical of Bronfman issue, which was legitimate & departure taxes generally, which aren’t seen outside Canada & Australia. B. used s. 107…)
Chapter 2: Employee & Individual Tax Problems
NR employed in Canada
§ 2(3)(a) - tax on NR
§ 248(1) - “taxable income earned in Canada” as determined under Div. D
§ Division D: Taxable Income Earned in Canada by NR
§ 115(1)(a)(i)
§ 3(a) - basic rules on tax on income from employment
§ Inclusions: ss. 6-
§ 7(1) - stock options, when exercised will generally be included in income
Hale
§ Hale, UK citizen, resident in Canada for 1984-85
§ Stock options
eg: 1000 @ $40:
§ leaves Canada in 1986, exercises options in 1987 (worth 60) = gain of $20,000
§ No departure tax on stock options
§ Assume a delayed bonus of $10,000 as well
Q: What does Canada tax him on?
§ $10,000 is taxable… we’ll skip the provision as to why
§ Stock option plan: 7(1)(a) - value less cost of the shares is deemed to have been received when shares are acquired. But in our case, ½ the value accrued after leaving Canada.
Court
§ TP claim it is not taxable since falls under the UK Convention exemption
§ 7(1)(b)(4) & 115(1)(a) can’t apply - inconsistent with 3(2) & 15(1) of the Convention
§ 15(1) UK Conv: pay taxes in Canada only if employment exercised there…
§ Rev, Can. is arguing 7(4) ITA deems TP a R (& 2(3) ITA)
§ TP is arguing that he wasn’t employed in Canada in the previous year & that the Conv trumps the ITA, thus 2(3) ITA na
§ Prof. not entirely clear of court’s argument
Class notes, p. 16
§ Hurd & Hale - same fact pattern. Ct ruled both subject to Canadian tax.
§ Basis of taxation of employment income is date of receipt
§ New facts: NR deriving income outside Canada = no tax. Gets options & exercised before returning to Canada = also no tax.
§ If exercised after his return to Canada, will be taxable on the full accrued amount (empl income taxed upon receipt).
Hewitt
§ Employed in Libya & made contributions to a company plan. Upon leaving in ’84, informed co. to pay to a location he would indicate later.
§ Upon return to Canada, tell co. to deposit to his Canadian bank account
§ Paid while in Canada; gut is to say: taxable in Canada
Court
§ Earned outside Canada, thus no tax
§ Equitable decision in favour of TP but effect is to reverse Hale. This ruling is out of left field.