DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Canada’s Quieter Campaign

In Canadian Income Tax, Tax Avoidance on September 2, 2009 at 6:31 pm

With the UBS ordeal making loud news across the border, Canada , in addition to continuing to piggy-back on the success of the IRS, quietly pursues its own ongoing campaign against off-shore tax evasion. While some may see the CRA’s efforts as slow to the point of non-existent, it is real, and it is progressing.

The Minister of Finance announced last week that it has signed its first Tax Information Exchange Agreement (TIEA) with a non-treaty tax jurisdiction. The sharing of tax information is normally included in Canada’s treaties, but this is different – it applies to non-treaty, traditionally low tax jurisdictions such as Bahamas, Caymen Islands, Jersey and the like. Last week’s agreement with the Netherlands-Antilles is the first in a long list of agreements that will be signed over the next five years.

The bad news, of course, is that these countries will now be happy to turn over information to the CRA that is necessary to help enforce Canadian tax law. Anyone doing business in these jurisdictions would be well advised to start thinking about the future and ensure that they have, in fact been complying with the rules.

The good news is that these countries will become more attractive jurisdictions for foreign business operations from a Canadian tax point of view. Any country that has signed a TIEA with Canada will be eligible for favourable treatment with respect to dividends coming back to Canada. The current rule is that any dividend paid from a non-treaty country is not eligible for exemption under our foreign-affiliate system. Now, any country that has a TIEA with Canada will also qualify for this treatment. So, earnings from active business in these countries can be repatriated to a Canadian parent company on a tax-deferred basis.

Now, back to the bad news. For those countries that do not sign a TIEA with Canada within five years from the day that Canada invites negotiations, active business earnings will not only fail to qualify for tax exempt repatriation, it will also become subject to Canada’s Foreign Accrual Property rules, better known as “FAPI”.

The bottom line? Expect Canada to put the pressure on many tax haven jurisdictions to sign these agreements, allowing the CRA to quietly cast its net over an ever-increasing area of the tax world.

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