As a general rule, non-resident actors or entertainers who derive income from performing in Canada will be subject to Canadian tax on such income. Typically, such persons are self-employed independent contractors, rather than employees. Therefore, they will be subject to tax in Canada on the basis that they are carrying on a business in Canada [1].

Even if they are resident in a country with which Canada has a tax treaty, they will generally still be subject to Canadian tax on income from such activities in Canada. Typically, Canada’s tax treaties contains a special provision that allows Canada to tax the income of actors and entertainers (as well as athletes), even if there is no “permanent establishment” or “fixed base” in Canada [2]. This will be the case even if the actor or entertainer forms a corporation through which to provide his or her services {3]. Read More

Canada and the US both tax employees who receive benefits from options they are granted to acquire shares in their employer or a related entity. This article will focus on the Canadian tax implication of employee stock options (“ESO”), and how these rules apply in certain Canada-US cross-border situations.

As a general rule, stock options benefits are taxed under section 7 of the Income Tax Act (“the Act”). No taxation results at the time that the ESO is granted-rather taxation results at the time the ESO is exercised. The amount taxable will be equal to the excess of the fair market of the stock at that time over the exercise price.

In cases where the ESO was not “in the money” at the time of grant (i.e. exercise price no Read More

When an individual, who was resident in Canada for tax purposes, ceases to be resident in Canada, there is generally a deemed disposition of assets owned by that individual at their fair market value. Any resulting deemed gain must be reported on the final tax return filed as a resident.

This is commonly called “departure tax”. However, unlike the kind of “departure tax” that is levied at some airports, there is no tax official in Canada waiting to collect it when the Canadian expat leaves. Rather, it is calculated and payable as part of the normal income tax filing.

This article will provide an outline of the key points in relation to the “Departure Tax”. Read More

Canadian corporations form US Subsidiaries, and US Corporations form Canadian Subsidiaries, all the time.

What are the cross-border tax implications when those subsidiaries are wound-up? This article will provide an overview of those implications.

Winding-up a US Subsidiary (“USco”) of a Canadian Corporation (“Canco”)

For US tax purposes, proceeds received on the wind-up of USco are generally not treated as a dividend, and hence no U.S. withholding tax should apply.

Rather, such amounts would generally represent proceeds from the shares which should Read More

A large percentage of countries that have income taxes levy withholding taxes on interest paid by residents of those countries to non-residents.

Up until fairly recently, Canada generally applied withholding tax under Part XIII of the Income Tax Act (“the Act”) on Canadian-source interest payments to non-residents. This general rule was subject to many exceptions, including one commonly used one that applied to five-year corporate debt, as well as exception for government obligations and foreign currency debt. In the absence of a lower rate being applied under a tax treaty, interest that was not eligible for an exemption was subject to 25% tax.

However, that all changed in 2008. As a general rule, Canadian-source interest payments Read More

It is very common for U.S. public corporations to “spin-off” their holdings in other US corporations, so that their shareholders own such holdings directly.

If properly implemented, a reorganization of this nature should be tax-free for US tax purposes as result of the application of IRC Sec. 355.

The Canadian Income Tax Act (“the Act”) has its own system for allowing “divisive reorganizations” to be implemented on a tax-free basis. In this country, they generally have to be structured as a “butterfly reorganization” under complex rules in paragraph 55(3)(b) of the Act, and related section. The shares to be spun-off would not be directly transferred to the shareholders of the distributing company. Instead, a more complex series of Read More

Envision a situation where a foreign corporation (“Forco”) buys all of the shares of a private Canadian corporation (“Canco”) for $10 million.

What happens if Canco generates profits, and Forco would like to use those profits to recover the $10 million cost of its investment in Canco?

Can Forco just take funds from Canco up to the amount of that cost without paying any Canadian withholding tax? It should be able to, since it is just trying to recover its cost, right?

Unfortunately, that is not the case. Any dividends that Canco pays to Forco will be subject to Read More

Canada Revenue Agency Reporting Requirements

A Canco which controls a Forco will have an obligation to submit certain special returns to the Canada Revenue Agency annually.

Failure to file such returns on a timely basis will expose Canco to significant penalties.

Form T1134

Any Canadian resident, whether a corporation or individual, with respect to which there is a “foreign affiliate” (“FA”) in a taxation year, must file form T1134 within 15 months after the end of that year with the CRA. An exception applies in connection with “dormant” FAs. Read More

Techniques for Minimizing Tax on the Sale of Forco Shares

In many cases, Forco will not be saleable by Canco as a stand-alone entity. Its value is strictly tied in to functions it performs for Canco’s corporate group.

However, there may be cases where Forco has value, and is saleable, on its own. This might particularly be the case if it owns valuable IP.

This article will discuss three techniques that may be used to eliminate or minimize the tax that would otherwise be payable by Canco on any gain resulting from the sale of Forco shares. Read More

The New Upstream Loan Rules

A Canco that will be using one or more Forcos as part of its offshore tax planning, should be aware of the new upstream loan rules.

Before the introduction of these rules, there were no Canadian tax consequences if Canco received a loan from Forco, even if that loan remained outstanding indefinitely.

Accordingly, if a dividend payment from Forco to Canco would have been taxable, because it was not derived from “exempt surplus”, Canco could, instead, just borrow money from Forco without paying any tax. This would be particularly relevant in connection with Forcos that operate in countries with which Canada has no tax treaty or tax information exchange Read More

Optimal Ownership Structures

So far, I have discussed the use of Forco within the context of a relatively simple structure where it would be a wholly-owned subsidiary of Canco.
In many situations, that simple structure will be appropriate, but in others situations, there may be a better alternative. Two common variations are discussed below.

Ownership by Canadian Sister Corporation of Canco

If the shareholders of Canco are Canadian resident individuals, consideration should be given to the possible application of the “capital gains exemption”, currently applicable to up to $800,000 in capital gains from the sale of “qualified small business corporation Read More

Using an Offshore Subsidiary to Finance Other Foreign Affiliates

In situations where substantial amounts of capital are needed to finance the active business operations of Canco’s foreign affiliates (“Forcos”), Canadian tax laws provide an incentive for Canco to form a financing affiliate (“Finco”) in an appropriate jurisdiction, which will permit little or no income tax to be paid on the interest that Finco earns.

This incentive is the fact that, as long as the interest received by Finco is deductible against the active business income earned by Forco in a foreign jurisdiction, that interest income will be deemed to be active business income, rather than FAPI, in Finco’s hands [1]. This will be the case even if Finco is relatively passive. Read More