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Tag Archive for Offshore Tax Planning For Canadian Corporations

The Basics of Offshore Tax Planning For Canadian Corporations – Part 10

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 9

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 Basics of Offshore Tax Planning For Canadian Corporations – Part 8

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 7

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 6

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 5

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 4

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 [1].

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 [2].

If the CRA successfully applies these rules, they could lead to a reassessment of Read more

The Basics of Offshore Tax Planning For Canadian Corporations – Part 3

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 2

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

The Basics of Offshore Tax Planning For Canadian Corporations – Part 1

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