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Canada

23 June 2021

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Canada Publishes New Information Circular on Competent Authority Assistance Under Canada's Tax Conventions

The Canada Revenue Agency (CRA) has published Information Circular IC71-17R6 Competent Authority Assistance under Canada's Tax Conventions, which is dated 1 June 2021. This circular replaces and cancels Information Circular 71-17R5 dated January 1, 2005.

As noted in Information Circular IC71-17R6, assistance by the Canadian competent authority is generally provided under the Mutual Agreement Procedure (MAP) article contained in Canada's tax conventions, although in certain situations other articles may apply to allow for competent authority assistance. For this purpose, various areas are covered in the new circular, including:

  • Making a request for assistance
  • Accelerated competent authority procedure (ACAP)
  • Acceptability of requests
  • Specific situations not accepted for Canadian competent authority negotiation consideration
  • Downward transfer pricing adjustments and foreign tax credits
  • Taxpayer responsibilities and participation
  • Timelines for a MAP
  • Tax avoidance
  • Appeals and court decisions
  • Collections
  • Interest and penalties
  • Competent authority agreements
  • Part XIII tax, repatriation of transfer pricing adjustments, and audit settlements
  • Provincial income tax considerations
  • Advance pricing arrangements (APAs)

An overview of typical requests for assistance is also provided as follows:

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Typical requests for assistance from the Canadian competent authority

Where a person considers that the actions of one or both governments result or will result in taxation not in accordance with a tax convention, the person may request competent authority assistance under the MAP article of a Canadian tax convention. Generally, taxpayers must approach the competent authority of their country of residence to request relief under a tax convention.

When an adjustment is made that affects a Canadian resident and a related party in a treaty country, both parties should request assistance from the competent authority of their country of residence in order to ensure that treaty-based relief is obtained for both parties. This could be accomplished by the parties filing their own requests, or by one party, duly authorized to act for the other, filing requests with both competent authorities to satisfy the administrative requirements of both jurisdictions. Where a competent authority request is filed only in the foreign jurisdiction and that jurisdiction has advised the Canadian competent authority of the request, the Canadian competent authority will consider a case involving related party transactions with a Canadian taxpayer where the other requirements of the relevant MAP article are met.

The Canadian taxpayer still has to make a formal request in accordance with this circular before the Canadian competent authority would actively work on the case. However, for example, where the non resident's request in the other jurisdiction was made in accordance with a MAP article, if the Canadian taxpayer agrees to file a request, its request will also be considered timely. Refer to paragraph 79 below for MAP procedures specific to the Canada-United States Income Tax Convention.

Examples of taxation not in accordance with a tax convention that may warrant a request for assistance to the Canadian competent authority include:

  • A Canadian resident taxpayer is also considered to be a resident of a treaty country under that country's domestic law, and each country asserts that the taxpayer is a resident of its jurisdiction for purposes of the tax convention. If unresolved, the taxpayer could be subject to tax on the same income in both countries. A request to the Canadian or the other competent authority will be necessary to initiate negotiations between the competent authorities regarding the proper application of the tie breaker rules contained in the residency article of the convention. The taxpayer should approach the competent authority of the country in which the taxpayer asserts residency.
  • A taxpayer in a treaty country is subject to additional tax because of an adjustment in respect of a transaction with a related party in Canada. The Canadian taxpayer may request that the Canadian competent authority allow a corresponding deduction in Canada to prevent double taxation.
  • A branch of a Canadian resident taxpayer operating in a treaty country is subject to additional tax because of an adjustment by the treaty country of the income allocated to the branch. The taxpayer may request that the Canadian competent authority allow an increased foreign tax credit in Canada to prevent double taxation.
  • A Canadian taxpayer subject to tax in Canada on world income, including income from carrying on a business in a treaty country, is taxed in the treaty country on the business income earned in the treaty country despite not having a permanent establishment in that country under the tax convention. The taxpayer may request the Canadian competent authority to address the issue of taxation not in accordance with the tax convention with the other competent authority.
  • Tax is withheld by a treaty country on a payment to a Canadian resident at a rate in excess of the rate stated in the tax convention. The taxpayer may request the Canadian competent authority to address the taxation not in accordance with the tax convention with the other competent authority.
  • Where there is uncertainty whether the treaty covers an item of income arising in the other jurisdiction, the taxpayer may approach the Canadian competent authority for clarification.

Most of the examples above deal with foreign-initiated adjustments. However, a Canadian resident may also seek assistance from the Canadian competent authority if the resident believes that a Canadian-initiated adjustment results in taxation not in accordance with the tax convention. For example, a taxpayer in Canada who is subject to additional tax because of a CRA adjustment in respect of a transaction with a related party in a treaty country, may request the Canadian competent authority to ask the other competent authority to allow a corresponding adjustment for the related party in the treaty country in order to prevent double taxation.

Where a request is made to the Canadian competent authority under the MAP article of a tax convention, the Canadian competent authority will first, if the request appears to be justified and can be accepted by the Canadian competent authority, attempt to resolve the matter unilaterally. For example, if the Canadian competent authority considers that the request for relief is warranted and the relief requested is entirely within the scope of Canada's tax laws, it could provide the relief without consulting the other competent authority. If the Canadian competent authority is not itself able to arrive at a satisfactory solution, it will endeavour to resolve the matter by mutual agreement with the other competent authority.

While most MAP requests are bilateral, there may be a situation where a MAP request is made involving more than two jurisdictions, and depending on the facts of the particular case and the treaty partners involved, it may be possible to initiate a multilateral MAP. The taxpayer must formally request a multilateral process in all jurisdictions and provide authorizations with respect to the exchange of information among all competent authorities involved before the Canadian competent authority will explore the possibility of a multilateral request.

Canada's tax conventions contain an article which is similar to Article 9 of the OECD Model Convention, which addresses transfer pricing adjustments. Article 9 or its equivalent is not worded in the same way in all of Canada's tax conventions, and may not be consistent with the OECD Model Convention wording, which requires a MAP dicussion where contracting states cannot agree on an adjustment to which Article 9 applies. However, despite differences in wording, the Canadian competent authority considers that all of Canada's tax conventions allow for the possibility of a MAP in connection with an Article 9 or equivalent issue.

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