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Canada

1 February 2014

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Budget for 2014 – international taxation

The Budget for 2014 was tabled by the Minister of Finance on 11 February 2014. Details of the Budget relating to international taxation, which unless otherwise indicated will apply from 1 January 2014, are summarized below.

- Captive insurance. Current rules prevent taxpayers from shifting certain Canadian-source income to no- or low-tax jurisdictions. Under these rules, such income earned by a controlled foreign affiliate of a taxpayer resident in Canada is considered foreign accrual property income (FAPI) and is taxable in the hands of the Canadian taxpayer on an accrual basis. A specific anti-avoidance rule in the FAPI regime is intended to prevent Canadian taxpayers, e.g. financial institutions, from shifting income from the insurance of Canadian risks offshore. This rule provides that income from the insurance of Canadian risks is FAPI where 10 per cent or more of the gross premium income (net of reinsurance ceded) of a foreign affiliate of the Canadian taxpayer in respect of all risks insured by the affiliate is premium income from Canadian risks. Budget 2014 proposes to amend the existing anti-avoidance rule in the FAPI regime to clarify that it applies where:
- taking into consideration one or more agreements or arrangements entered into by the foreign affiliate, or by a person or partnership that does not deal at arm's length with the affiliate, the affiliate's risk of loss or opportunity for gain or profit in respect of one or more foreign risks can – or could if the affiliate had entered into the agreements or arrangements directly – reasonably be considered to be determined by reference to the returns from one or more other risks (the tracked risks) that are insured by other parties; and
- at least 10 per cent of the tracked risks are Canadian risks.
- Offshore regulated banks. An exception to the FAPI rules applies to regulated foreign financial institution, pursuant to which certain bona fide financial services businesses carried on by foreign affiliates are treated as active businesses rather than as investment businesses. Budget 2014 proposes new conditions to qualify as a foreign financial institution.
- Back-to-back loans. Budget 2014 proposes to address back-to-back loan arrangements by adding a specific anti-avoidance rule in respect of withholding tax on interest payments, and by amending the existing anti-avoidance provision in the thin capitalization rules.
- Consultation on tax planning by multinational enterprises. In response to the OECD's BEPS Action Plan, the government is interested in obtaining views on how to ensure fairness among different categories of taxpayers (e.g. MNEs, small businesses and individuals) and how to better protect the Canadian tax base, while maintaining an internationally competitive tax system that is attractive for investment.
- Consultation on treaty shopping. Following up on the consultation paper on treaty shopping released in response to Budget 2013, the government is seeking input on a proposed rule to prevent treaty shopping. The rule would address arrangements identified as an improper use of Canada's tax treaties in the consultation paper and, therefore, protect the integrity of Canada's tax treaties. The rule would use a general approach focused on avoidance transactions and, in order to provide more certainty and predictability for taxpayers, building on comments received on the 2013 consultation paper, the rule would contain specific provisions setting out the ambit of its application. The approach would ensure that treaty benefits are provided with respect to ordinary commercial transactions and that, if the rule applies, the benefit that would be reasonable under the circumstances would be provided.
- Update on automatic exchange of information for tax purposes. In 2010, the United States enacted provisions known as the Foreign Account Tax Compliance Act (FATCA). FATCA would require non-US financial institutions to identify accounts held by US persons, which include US citizens living abroad, and report to the US Internal Revenue Service (IRS) information in respect of these accounts. The government negotiated an intergovernmental agreement with the United States that contains significant exemptions and other relief. Under the approach in the Canada-US agreement, which was signed on 5 February 2014, Canadian financial institutions will report to the CRA information in respect of US persons that will be transmitted by the CRA to the IRS under the Canada-US tax treaty and be subject to its confidentiality safeguards. A variety of registered accounts (including Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans, Registered Disability Savings Plans, and Tax-Free Savings Accounts) and smaller deposit-taking institutions, such as credit unions, with assets of less than CAD 175 million will be exempt from reporting. Meanwhile, the CRA will receive information from the US in respect of Canadian resident taxpayers that hold accounts at US financial institutions, which will assist Canadian tax authorities in administering and enforcing compliance with Canadian tax laws. While the Canada-US tax treaty contains a provision that allows a country to collect the taxes imposed by the other country, the CRA will not collect the US tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a US citizen at that time). This new reporting regime will come into effect starting in July 2014, with Canada and the United States beginning to receive enhanced tax information from each other in 2015.

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