Over the past few years, the issue of "tax avoidance"
has dominated agendas at both Canadian and international tax
conferences. The issue has also received considerable news
coverage as a result of the actions of certain large companies with
complicated tax structures that were seen not to be paying their
fair share of taxes. Many countries, including Canada, have
been waiting to receive guidance on how to deal with this and other
issues from the Organization for Economic Co-operation and
Development (OECD), the premier supranational organization that
helps governments implement international tax principles.
On September 16th, the OECD released a series of
much-anticipated reports containing recommendations for ensuring
the profits of corporations with entities or operations in more
than one country are taxed appropriately. Charities and
not-for-profit lawyers took note of these new reports since the
recommendations also address the use of tax-exempt organizations as
a means of avoiding tax.
What prompted the OECD to study this issue was the potential for
companies to abuse international tax rules by setting up entities,
including not-for-profit organizations, for the purpose of avoiding
tax. By way of background, international tax rules generally
consist of treaties entered into between the national governments
of two countries. Canada's tax treaties (of which there
are 92 currently in force) typically provide that Canada will not
tax certain types of income if that income is taxed by the other
signatory to the treaty, and vice versa. This ensures that
income is not taxed twice (i.e., by both Canada and the other
country). The potential for the same income to be taxed in
two separate jurisdictions is commonly referred to as "double
taxation". In the case of not-for-profit organizations,
tax treaties contain rules that ensure Canadian not-for-profit
organizations, for example, are not inappropriately subject to tax
in other jurisdictions.
Generally speaking, in order to qualify for treaty benefits, a
company must be a "resident" of a country that is a party
to a tax treaty. For example, under the Canada-U.S. Tax
Treaty, Canadian not-for-profit organizations are
"residents" of Canada and will therefore qualify for U.S.
tax relief in certain circumstances where they may derive income in
the U.S. However, the OECD is now recommending that only
"residents" that are "qualifying persons"
should be entitled to treaty benefits. Its specific
recommendation is that those not-for-profit organizations that
qualify for treaty benefits should be listed in the treaties
themselves. This rule would likely make it more difficult for
not-for-profit organizations to be eligible for treaty benefits by
virtue of the fact that they would have to be mentioned (at least
by category) in a tax treaty.
It is unclear whether Canada will incorporate this particular
OECD recommendation into its existing tax treaties, or on a
going-forward basis in any new treaties. However, in the
past, Canada has typically modeled its tax treaties based on OECD
recommendations. Moreover, the federal Department of Finance
(which is responsible for implementing tax policy in Canada) had
indicated that it was waiting for the OECD to release these reports
before making any final decisions with respect to how it planned to
deal with certain aspects of the "tax avoidance"
issue. We will continue to follow developments in this area,
including reactions from the Department of Finance, and report on
them as necessary.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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