Edited by Laura Monteith and Jennifer Hanna
Canada and U.S. Announce Agreement regarding PE
Attribution of Income Principles under Canada-U.S.
Treaty
By: Jim Wilson and Pierre Alary
The 5th Protocol to the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital (Canada-U.S. Treaty and 5th Protocol), which came into effect on December 15, 2008, introduced several significant and highly anticipated changes to the Canada-U.S. Treaty. One significant change that arose as a consequence of the 5th Protocol relates to the computation of income attributable to a permanent establishment (PE), with such change providing, it would appear, that certain notional expenses are now deductible in computing the income attributable to a PE under Article VII (Business Profits) of the Canada-U.S. Treaty. The 5th Protocol amendment supports the application of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, by analogy, for the purposes of determining the business profits attributable to a PE. While most of the amendments to the Canada-U.S. Treaty have been analyzed at length by the tax community, this change relating to the computation of income attributable to a PE seemed to go quietly under the radar. However, on June 26, 2012, more than three and a half years following the coming into force of the 5th Protocol, the competent authorities of the United States and Canada entered into an agreement (Competent Authority Agreement) regarding the application of Article VII of the Canada-U.S. Treaty which provides that the competent authorities will interpret Article VII of the Canada-U.S. Treaty in a manner entirely consistent with the full authorized OECD approach (AOA).
Three-year Statute of Limitation on Refunds of
"Overpayments" for Corporations: Has CRA Opened
Pandora's Box?
By: Jim Wilson, Pierre Alary and Colleen McMullin
The purpose of statutory limitation rules is to introduce some finality into the law. For a country's taxing authority, a limitation period may serve the additional purpose of allowing it to finally "close its books" and ascertain its tax base. In Canada, subsection 164(1) of the Income Tax Act (ITA) prevents an overpayment of tax from being refunded beyond three years from the year in which the taxpayer made the overpayment. The rules provide the Canada Revenue Agency (CRA) the discretion to extend this period to up to 10 years, although not for corporate taxpayers. Recent amendments to the ITA, namely the addition of paragraph 164(1.5)(c), as well as a recent CRA technical interpretation on the interaction between subsection 221.2(1) (dealing with the re-appropriation of debts) and subsection 164(1) have caused tax advisers to question the "three-year limitation" adage. In addition, certain tax treaty provisions, such as the Mutual Agreement Procedure (MAP) Article of the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital (Canada-U.S. Treaty), operate to further blur the rule. Many tax professionals are left wondering: has the three-year statutory limitation on refunds of overpayments for corporations, for all intents and purposes, become merely an unnecessary hurdle in the ITA?
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