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

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

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 [1], and, in fact, these taxes may well be higher than if the income had been earned by Canco [2].

To determine whether Forco is carrying on business in Canada, one must consider the nature of Forco’s income earning activities. Read More

Introduction

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