Using an Offshore Subsidiary to Hold IP
In many corporate groups, particularly in the internet age, the real wealth lies in the IP-patents, trademarks, computer software.
Often, it is quite tempting to look for ways to move such IP offshore, both for tax and other reasons. Stories of IP-based companies such as Google and Apple generating profits in tax havens provide intriguing examples of the possibilities.
In an ideal situation, income derived from exploiting such IP could be earned and accumulated in Forco with little or no Canadian income tax applying. Read More
Transfer Pricing Issues
As is the case with most major counties, Canada has rules in its tax laws aimed at preventing income from being shifted to other jurisdictions by unreasonable transfer pricing .
To date, most of the activity of the CRA and reported tax cases has focused more on inbound transfer pricing issues involving charges by multi-national corporations to Canadian subsidiaries. However, the rules can certainly be applied in connection with outbound tax planning of the type being outlined in this series .
If the CRA successfully applies these rules, they could lead to a reassessment of Read More
Active Business Income vs. FAPI
The tax benefits of setting-up an offshore structure and establishing Forco will only be present with respect to income earned by Forco that is considered to be income from an active business. If the income is classified as “foreign accrual property income” (“FAPI”), there will generally be no benefit achieved.
FAPI is a key concept that is part of Canada’s tax system for taxing income earned through “foreign affiliates”. In many respects, FAPI is similar to the US tax concept of “Subpart F income”.
Namely, it is a mechanism aimed at preventing taxpayers from deferring tax on certain Read More
Carrying On Business in Canada
The mere fact that Forco is not resident in Canada will not, in and of itself, ensure that Forco’s income is not subject to Canadian tax.
Care must also be taken that none of Forco’s income is derived from carrying on business in Canada. To the extent that it is, Forco may be subject to Canadian tax , and, in fact, these taxes may well be higher than if the income had been earned by Canco .
To determine whether Forco is carrying on business in Canada, one must consider the nature of Forco’s income earning activities. Read More
In my blog that was posted on June 3, 2014, Canadian Corporations Can Repatriate Profits of Offshore Subsidiaries Tax-Free, I explained that Canadian-based corporations, unlike their U.S. counterparts, can usually repatriate the earnings of offshore subsidiaries, free of Canadian tax. This is usually true even if those earnings have borne little or no tax at all in the offshore jurisdictions.
In response to that posting, I received many emails from Canadian corporations and their professional advisers asking for more information about what is required and entailed to successfully set-up an offshore corporate structure. Read More
Like many countries. Canada taxes non-residents who realize gains on real estate located within its borders(1).
This will be true whether the real estate is capital property that is held for the purposes of earning from rental or a business; capital property held for personal use; or inventory of a business (e.g. where it is held for resale).
This article will focus on situations where the real estate is capital property.
The Income Tax Act (“the Act”) provides that non-residents are subject to tax in Canada on taxable gains from the “disposition” (which can include sales, as well as other events deemed to be dispositions, such as death) of “taxable Canadian property” (“TCP”)(2). TCP Read More
Canada and the United States have very different regimes for imposing taxes on death. The United States imposes a Federal Estate Tax; however, Canada has not imposed any Estate Tax since 1971. Rather, Canada taxes accrued, but unrealized, capital gains on death, as part of its income tax system.
Most tax practitioners are not aware of the fact that there special rules found in Article XXIX-B of the Canada-United Tax Convention (“the Treaty”) that are aimed at providing relief in connection with certain cross-border death taxes issues.
Some of these are summarized below:
As a general rule, U.S. residents are only subject to Canadian tax on business income to the extent that such income is earned via a permanent establishment (“PE”) in Canada(1).
If a U.S. C corporation earns profits that are taxable in Canada, such profits will be subject to federal corporate taxation under Part I of the Income Tax Act (“the Act”) at a rate of 15%, plus, assuming there is a PE in a province, provincial corporate taxation at varying rates. For example, in Ontario the rate is 11.5% and in Alberta the rate is 10%, thereby resulting in combined corporate tax rates of 26.5% and 25%, respectively(2).
In addition, a U.S. corporation earning income from carrying on business in Canada may also be subject to the “branch tax” that is levied under Part XIV of the Act. This tax is quite Read More
There is a little-known method by which wealthy immigrants to Canada can use a holding company (“Holdco”), either in Canada or offshore, to receive, otherwise taxable, money tax-free in Canada.
This will be applicable in situations where that immigrant holds a significant interest in foreign a corporation (“Forco”), either alone, or with family members.
This technique will be even more attractive now that “immigrant trusts” will no longer be available as a tax planning tool for wealthy immigrants (see my blog posting A Sudden Death For The Canadian “Immigrant Trust”!). Read More
In certain cases, a distribution of capital by a trust(1) to a non-resident beneficiary will bring into play certain notification and tax clearance requirements found in subsection 116.
As a general rule, a distribution of capital by a trust to a beneficiary is considered a “disposition” by that beneficiary of all or a portion of that beneficiary’s capital interest in the trust(2).
If the interest of the beneficiary is “taxable Canadian property” (“TCP”), the beneficiary will be required to send a notification of such disposition to the Canada Revenue Agency (“CRA”) within 10 days after the disposition(3). In addition, the CRA takes the position that the trust itself can be liable for tax, in such circumstances, if a tax clearance is not Read More
Many Canadian corporations form a foreign subsidiary (“Forco”) in zero or low-tax jurisdictions in order to reduce their tax liabilities.
This is a strategy that can work as long as the following four elements are present:
1) Forco is not resident in Canada, having regard to common law concepts of corporate residency (“mind and management”).
2) The income of Forco is considered to be income from an “active business”, as opposed to “foreign accrual property income” (“FAPI”).
3) Forco’s business is not carried on in Canada, and Read More
The question of whether or not a person is “resident in Canada” (which includes a person who is “ordinarily resident”) is undoubtedly the most pivotal issue under the Income Tax Act.
If the answer is “yes”, the person will generally be subject to Canadian tax on all worldwide income; if the answer is “no”, then only certain, generally Canadian, sources, will be subject to Canadian tax.
The determination of residency for Canadian tax purposes is largely based on old UK tax cases that have been adopted and embraced by Canadian courts. By far, the leading Canadian decision in this area is that of the Supreme Court of Canada in Thomson v. Read More