Transcript PowerPoint Slides - Chapter 20
International Issues In Taxation
Residence Taxation of non-residents on Canadian source income Double taxation issues Emigration and immigration Foreign source income earned by residents © 2010, Clarence Byrd Inc.
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The average Canadian individual whose job, family, dwelling place, and other personal property are all in Canada, would clearly be a Canadian resident and, as a result, he would be liable for Canadian taxation on his worldwide income.
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Basic ties
Dwelling
Spouse or
common-law partner Dependants
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Other Considerations
Personal Property
Social Ties
Economic Ties
Health Card, Driver’s License
Vehicle Registration
Passport
Canadian Unions Or Professional Associations
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Taxation basis
Worldwide income
Pro rata for year
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Entering Canada
Usual immigration rules
Other factors may be considered
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Departing Canada:
Latest Of: Departure Date Departure Of Spouse And Dependants Establishment Of New Residence
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1. Sojourners in Canada for 183 days or more.
2. Members, at any time during the year, of the Canadian armed forces when stationed outside of Canada.
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3. Ambassadors, ministers, high commissioners, officers or servants of Canada, as well as agents general, officers, or servants of a province, provided they were Canadian residents immediately prior to their appointment.
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4. An individual performing services, at any time in the year, in a country other than Canada under a prescribed international development assistance program of the Government of Canada, provided they were resident in Canada at any time in the 3 month period preceding the day on which those services commenced.
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5. A child of a deemed resident, provided they are also a dependant whose net income for the year was less than the base for the basic personal tax credit ($10,382 for 2010).
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6. An individual who was at any time in the year, under an agreement or a convention with one or more other countries, entitled to an exemption from an income tax otherwise payable in any of those countries, because at that time the person was related to, or a member of, the family of an individual who was resident in Canada.
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Incorporated In Canada After April 26, 1965
Deemed Resident
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Incorporated In Canada Before April 27, 1965
Deemed Resident If:
Was Resident At Any Time
Carried On Business In Canada
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Incorporated Outside Of Canada
Mind And Management Of Company
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Choices
Management (Usual Determinate)
Beneficiaries
Assets
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Employment In Canada
Carried On Business In Canada
Disposition Of Taxable Canadian Property
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ITA 2(3) – Non-residents taxed on employment income earned in Canada ITA 115(2) – Deemed employment income Teachers who continue teaching after taking up residence in another country Non-residents remunerated from a Canadian source Non-residents receiving signing bonuses for work to be performed in Canada © 2010, Clarence Byrd Inc.
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U.S. /Canada Tax Convention $10,000 rule – no tax if less than $10,000 183 day rule – no tax if less than 183 days and not deductible in Canada © 2010, Clarence Byrd Inc.
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General Rules Producing, growing, etc.
Soliciting orders Disposing of certain types of property © 2010, Clarence Byrd Inc.
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U.S./Canada Tax Convention Income taxable if a permanent establishment Excludes certain facilities (e.g., storage facility) An agent who can conclude contracts is viewed as permanent establishment.
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Importance ITA 2(3) Gains On Dispositions Taxed In Hands Of Non-Residents © 2010, Clarence Byrd Inc.
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Real Property Partnership and trust if TCP is main value Private Company Shares (>50%) Public Company Shares (>25%) © 2010, Clarence Byrd Inc.
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U.S./Canada treaty limits to: Canada real property Property that is part of a permanent establishment Investments whose value is primarily attributed to real property. © 2010, Clarence Byrd Inc.
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Non-residents earning Canadian source employment income, business income, or capital gains on taxable Canadian property are taxed under Part I Property income (interest, rents, royalties, and dividends) are generally subject to tax under Part XIII General rate is 25 percent – However, usually modified by tax conventions.
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Interest Income - General Part XIII is applicable only to Interest on participating debt Interest paid to non-arm’s length non residents (unless exempt) Most arm’s length interest is exempt © 2010, Clarence Byrd Inc.
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Interest Income – to U.S. residents Part XIII no longer applicable © 2010, Clarence Byrd Inc.
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Royalties In general, the Part XIII rate is 25 percent U.S. /Canada Tax Treaty Reduces rate to 10 percent Reduces rate to nil for copyright and computer software royalties.
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Rents If in rental business – Part I applies If not, Part XIII is assessed at 25% Problem: Part XIII is a flat tax on gross proceeds (no deductions) Solution: For real property rentals, non-resident can elect to be taxed under Part I (can deduct expenses) © 2010, Clarence Byrd Inc.
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Dividends In general, dividends are subject to Part XIII at 25 percent U.S./Canada tax treaty Rate to 5 percent if U.S. recipient is a corporation and owns 10 percent or more of payor Rate to 15 percent for other dividends to U.S. recipients © 2010, Clarence Byrd Inc.
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Retirement related benefits In general, subject to Part XIII Some exceptions Can also elect to be taxed under Part I U.S./Canada tax treaty Rate reduced to 15 percent for periodic payments In general, OAS and CPP received by U.S. residents will only be taxed in the U.S.
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Dual Residence - Individuals Generally resolved by “tie breaker” rules in tax conventions.
U.S./Canada tax treaty looks at Permanent home Centre of vital interests Habitual abode Citizenship Competent authority procedures © 2010, Clarence Byrd Inc.
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Dual Residence – Corporations Incorporated in Canada after 1965, but with mind and management in U.S.
U.S/Canada tax treaty views country of incorporation as determining © 2010, Clarence Byrd Inc.
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Dual Source Individuals: treaty identifies which country has primary right Corporations: Allowed to change jurisdiction through a process called continuation © 2010, Clarence Byrd Inc.
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Residence Vs. Citizenship U.S taxes on citizenship while Canada taxes on residence A U.S. citizen resident in Canada is subject to taxes in both countries In this situation, Canadian resident gets a credit against U.S. taxes for Canadian taxes paid © 2010, Clarence Byrd Inc.
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Residence Vs. Source A resident of Canada may be subject to another country’s taxes on income sourced from that country.
Resolved through the use of foreign tax credits (see Chapters 11 and 12) © 2010, Clarence Byrd Inc.
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Deemed Disposition Immediately Prior To Arrival Deemed Acquisition On Date Of Arrival © 2010, Clarence Byrd Inc.
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Deemed Disposition General Rule Exceptions Real Property Business Property Excluded Personal Property RPPs RRSPs DPSPs Stock Options © 2010, Clarence Byrd Inc.
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ITA 128.1(4)(d) Election Allows Disposition When Not Required © 2010, Clarence Byrd Inc.
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Problems Consistency Avoidance Through Treaties © 2010, Clarence Byrd Inc.
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Security For Tax Tax Could Be Burdensome Deemed Security On 1 st $100,000 No Interest On Amounts Secured © 2010, Clarence Byrd Inc.
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Unwinding a disposition
Maxine Howard leaves Canada on December 1, 2010. At that time, she owns shares of a private corporation with a FMV of $340,000 and an ACB of $220,000. As a result of the deemed disposition/reacquisition, she has a taxable capital gain of $60,000 [(1/2)($340,000 $220,000). In 2011 she returns to Canada. She still owns the shares and they have a FMV of $430,000.
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Unwinding A Disposition - At Departure
POD ACB Capital Gain $340,000 220,000 $120,000 © 2010, Clarence Byrd Inc.
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Unwinding A Disposition - On Return Election Under ITA 128.1(6)
Reverses Deemed Disposition On Departure Amended Return No Disposition On Departure – No Reacquisition On Return Taxable Canadian Property Only © 2010, Clarence Byrd Inc.
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60 Months Or Less In Last Ten Years No Deemed Disposition On Property Owned Before Last Becoming Resident Still Applies To Property Acquired As A Resident © 2010, Clarence Byrd Inc.
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Like the situation with non-resident earnings Canadian employment income $10,000 rule 183 day rule © 2010, Clarence Byrd Inc.
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Taxation based on presence of permanent establishments If permanent establishment in source country, income will be taxed there If no permanent establishment, income will be taxed in Canada © 2010, Clarence Byrd Inc.
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In general, the ITA rules apply without regard to the location of the property being sold U.S./Canada tax treaty gives the U.S. the right to tax gains on real property and property used in a permanent establishment © 2010, Clarence Byrd Inc.
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In general, Canadian residents are subject to tax on foreign source investment income Problems Dividends: source company has not paid Canadian taxes Compliance issues Complexity issues © 2010, Clarence Byrd Inc.
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Foreign investment reporting requirements Required when total ACB > $100,000 Includes Foreign bank accounts Shares of non-resident corporations Real property located outside of Canada Excluded Business property Personal use property Substantial penalties © 2010, Clarence Byrd Inc.
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Non-resident entities
Any type of organization (corporation, trust, or other) that is organized, continued, or governed under the laws of a country other than Canada © 2010, Clarence Byrd Inc.
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Non-Resident Entities Types Foreign affiliates Controlled foreign affiliates Foreign investment entities © 2010, Clarence Byrd Inc.
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Non-resident entities
Issues Dividends are paid from income that has not been taxed in Canada – solved by not getting tax credit Elimination of tax credit can result in double taxation Income may not be taxed in Canada until it is distributed © 2010, Clarence Byrd Inc.
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Foreign Affiliates Taxpayer has an equity percentage of at least 1 percent Taxpayer and related persons have at least 10 percent © 2010, Clarence Byrd Inc.
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Foreign Affiliates In general, only dividends from taxable Canadian corporations can be deducted under ITA 112(1) ITA 113(1) provides an equivalent deduction for dividends from foreign affiliates © 2010, Clarence Byrd Inc.
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Controlled Foreign Affiliates Defined Controlled by taxpayer Other (see Paragraph 20-156) Required to report foreign accrual property income (FAPI) © 2010, Clarence Byrd Inc.
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Foreign Accrual Property Income (FAPI) Includes Property income of controlled foreign affiliate Capital gains of controlled foreign affiliate Becomes active business income if more than five full time employees Income is taxed as it accrues Dividends paid from FAPI can be deducted to offset tax paid on accrual © 2010, Clarence Byrd Inc.
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Foreign Affiliate Dividends Requires surplus tracking Exempt surplus Taxable surplus Pre-acquisition surplus © 2010, Clarence Byrd Inc.
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Foreign Affiliate Dividends – ordering rule 1 st from exempt surplus Next from taxable surplus Residual from pre-acquisition surplus © 2010, Clarence Byrd Inc.
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Foreign Affiliate Dividends – Deductible Amounts 100 percent if from exempt surplus Limited amount from taxable surplus Amount based on foreign tax amounts withheld 100 percent if from pre-acquisition surplus © 2010, Clarence Byrd Inc.
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Foreign Investment Entity: any non-resident entity, unless It is a partnership; It is an exempt non-resident trust; Carrying value of investment property does not exceed one half of the carrying value of all property; or Its principal business is not an investment business.
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Proposed Tax Based on designated cost of investment Rate = prescribed rate, plus 2 percent Very harsh © 2010, Clarence Byrd Inc.
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In general, subject to foreign tax credit procedures See Chapters 11 and 12 © 2010, Clarence Byrd Inc.
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