Canada: Canadian International Taxation Budget Alert

Last Updated: March 24 1998


International tax provisions in Canada's recent federal budget are the latest in a long list of measures designed to require full disclosure by those earning income in Canada and to target tax avoidance.


Transfer Pricing

Although absent from the 1998 budget, new transfer pricing legislation requires transactions with related non-residents to occur on arm's length terms and conditions. Transactions failing to meet this test may be adjusted and a penalty of 10% of the adjustment may be assessed. Contemporaneous documentation evidencing arm's length pricing is the best defence. The new legislation will apply for taxation years beginning after 1997 but the levying of penalties is delayed one year.

Related Party Reporting

Form T106, used by corporate taxpayers to report transactions with related non-residents since 1988, must now be filed by individuals, partnerships and trusts after 1997. Taxpayers with transactions with related non-residents less than $1 million in aggregate in the year are exempt from filing.

Foreign Reporting

The first filing deadlines for foreign information reporting announced in March of 1996 are in 1998. The requirement to report foreign investment property over $100,000 has been delayed to April 30, 1999 pending further review.


Treaty Based Disclosure

For taxation years beginning after 1998, non-resident corporations carrying on business in Canada must file an information return disclosing if they are claiming a treaty-based exemption from Canadian tax. This will identify those non-resident companies carrying on business in Canada without Canadian permanent establishments.

Tax Deferred Foreign Mergers

Although Canadian domestic amalgamations can occur on a tax-deferred basis, Canadian tax deferral has not been provided for foreign triangular amalgamations whereby shares of one or more merging foreign corporations are exchanged for shares of a foreign corporation which controls the merged corporation. After February 24, 1998 such mergers can occur on a tax deferred basis for Canadian tax purposes. In addition, a Canadian taxpayer that previously exchanged shares in a triangular merger in a taxation year that will not become statute-barred before 1999, may elect to have these new rules apply. Canadian taxpayers may wish to review previously taxable mergers, to determine if they can now elect to gain tax deferred treatment.

Expansion of Anti-Avoidance Rules: Corporate Immigration and Surplus Stripping

Current Canadian tax rules allow a non-resident company that owns a Canadian subsidiary to immigrate to Canada and defer Canadian tax on the appreciation of Canadian assets and Canadian operating surplus. These rules can be avoided by selling the immigrating corporation's shares prior to immigration to a Canadian resident company for shares with paid up capital and cost equal to fair market value. Thereafter, surplus can be paid as dividends up the Canadian corporate chain and the shares sold free of tax.

Anti-avoidance rules are introduced effective to corporate immigrations after February 23, 1998 to prevent such planning:

  • such companies will be deemed to have sold all their property, including Canadian property, at fair market value,
  • dividend will be deemed received from subsidiary Canadian companies equal to the difference between the fair market value and paid-up capital of the Canadian subsidiary's shares,
  • similar changes will apply to an immigrating corporation that previously had a Canadian branch. To prevent surplus stripping, the corporation will be subject to Canadian branch tax on its Canadian surplus in the year prior to immigration.

Existing anti-avoidance rules apply to prevent the tax free conversion of otherwise taxable surplus of a Canadian company to tax free proceeds of disposition on the sale of the company's shares to another non arm's length Canadian company. For such dispositions after February 23, 1998, these rules will now also apply to the transfer of shares of all Canadian resident companies to any other Canadian resident company, whether or not it is at arm's length. In addition, these rules will apply where the non-resident vendor is a partnership where any non-resident person (or a non-resident-owned investment corporation) is a majority partner. These rules will not apply where the non-resident vendor transferring Canadian shares is subject to taxation in Canada and Canada's right to tax the transfer is not prevented by Treaty.

Canada's Domestic and Treaty Tax Rules Harmonized To Prevent Abuse

For 1998 and subsequent taxation years the budget proposes several changes to correct anomalies that exist between Canada's domestic rules and its network of tax treaties. These amendments imply that it may be possible (subject to anti-avoidance provisions) to defend aggressive tax filings in taxation years ending prior to 1998.

  • Individuals claiming exemption from Canadian tax due to non-resident status provided by a tax treaty will be deemed non-resident of Canada for Canadian domestic tax purposes. This will prevent them avoiding Canadian withholding tax on Canadian sourced interest and dividends, claiming the benefits of Canadian controlled private corporation status for Canadian companies they control, claiming principal residence exemptions and will deny them continued ability to contribute to an RRSP in respect of foreign employment income. It may still be possible to defend such planning for taxation years that end prior to 1998.
  • Canada taxes non-residents on their "taxable income earned in Canada" i.e. Canadian sourced income from employment, business and gains from the disposition of taxable Canadian property. Pre-budget rules do not directly exclude treaty exempt income or losses from this definition and thus it is technically possible prior to 1998 taxation years for a non-resident to deduct Canadian business losses from other Canadian sourced income even though income from the Canadian business would have been exempt from Canadian tax due to a tax treaty provision (i.e. no permanent establishment in Canada). Such losses will no longer be deductible as of the 1998 taxation year.
  • A Canadian resident may deduct from Canadian tax payable, foreign tax paid on foreign income up to the equivalent amount of Canadian tax paid on the foreign income. For taxation years ending prior to 1998, the foreign tax credit limit is calculated separately for each foreign country and is generally based on the proportion of Canadian tax that foreign income (including foreign income on which there is no foreign tax due to a treaty based exemption) bares to world-wide income but cannot exceed foreign tax paid. The budget proposes to exclude treaty protected foreign income from the foreign tax credit calculation thus ensuring that the foreign tax credit cannot be inflated by foreign income on which no foreign tax is paid. Unless certain conditions are met, former residents of Canada are subject to tax in Canada on amounts paid by their Canadian employers. Beginning in 1998, amounts paid by Canadian employers to former residents will no longer be subject to tax in Canada if the payments are taxable in their country of residence. Canada will tax these amounts only if the payments are exempt from foreign tax because of a tax treaty.

Amounts Owing by Non-Residents

Canadian corporations must accrue interest income at prescribed rates on loans made to non-residents if the loans are outstanding greater than one year. Exceptions are provided if the loan to a shareholder or other related non-resident is considered a shareholder appropriation (in this event the loan will be deemed a dividend subject to withholding tax) or if the loan was made to a non-resident "subsidiary controlled corporation" to be used in that corporation's business for the purpose of gaining or producing income. Effective for taxation years and fiscal periods that begin after February 23, 1998:

  • all amounts owing, directly or indirectly, by non-residents (i.e. trade accounts receivable and inter-company receivables) will now attract interest income,
  • loans to a subsidiary controlled corporation will attract interest if the loan is not used by it to carry on an active business. Thus loans will attract interest if they are to first tier foreign subsidiaries to allow them to earn income from interest and dividends,
  • avoidance of these rules by causing the loans to be made by a trust or partnership will no longer be possible where a corporation resident in Canada is a beneficiary or partner of the trust or partnership.
Relocation Expenses

It is commonplace with many international employee transfers to reimburse the employee for relocation costs, often including cash payments, to absorb losses arising on the disposition of the former home or to assist with incremental financing of the new home. The trend in tax jurisprudence has allowed tax free receipt of reimbursement of a loss incurred on the sale of an employee's former home or a subsidy for interest payable on the new mortgage. The budget introduces specific legislation that will result in taxation of employer reimbursements or subsidies provided to finance the employee's new or former home. In addition, one-half of the employer reimbursement in excess of $15,000 that relates to a loss on the sale of a former home will be taxable. Grandfathering provisions will allow the more generous treatment allowed by the courts to apply to payments made prior to 2001 if the employee begins work at the new location before July, 1998.

Foreign Tax Credit Abuse

Canadian taxpayers are subject to income tax on their world-wide income. To prevent double taxation of income earned in foreign countries, Canadian taxpayers are allowed to claim a foreign tax credit (FTC) for income tax paid in a foreign jurisdiction which is generally equal to Canadian tax otherwise payable on that income but not to exceed the foreign income tax paid. Generally, the Canadian tax is computed by prorating total Canadian tax by the ratio of foreign income to total income. To maximize the FTC a Canadian taxpayer could acquire (under a short term loan or repurchase arrangement) a foreign security (debt or share) immediately before a dividend or interest payment was to occur. Immediately thereafter the security would be sold back to the original owner. Although there may be little gain or even a loss on disposition, the Canadian taxpayer could receive a higher FTC under the pro rata formula. After February 23, 1998, for such transactions which are flipped within 1 year, the amount of FTC will be restricted to 40% of the gross profit realized for business income and to 30% for non-business income. In addition, no FTC will be allowed if the net foreign profit on the disposition of a foreign property is not "material" when compared to the foreign income tax paid. No indication is given of what is meant by the materiality test.

Goods & Services Tax

To encourage tourism, rebates are available under the GST/HST for certain purchases by tourists and non-resident convention organizers. The Budget proposes to broaden the rebates to include meals relating to certain foreign conventions, and campsite fees. Measures were also introduced to further simplify rebate claim procedures.

Countervailing and Anti-dumping Duties

Countervailing and anti-dumping duties paid to foreign countries after February 23, 1998 can now be deducted in the year paid and subsequent refunds must be included in computing income in the year refunded.

The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.

While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your Coopers & Lybrand advisor, or: David W. Steele, Coopers & Lybrand, 145 King Street West, Toronto, Ontario M5H 1V8, Canada on Fax: 1-416-941-8415 E-mail: Click Contact Link

David W. Steele
145 King Street West
Toronto, Ontario  M5H 1V8
Fax:    1-416-941-8415
E-mail:    Click Contact Link 

Click Contact Link

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.