Canada: Budget 2016: Significant International Tax Proposals Unveiled

Last Updated: March 31 2016
Article by Todd Miller

BEPS-Related Changes

Over the past several years, Canada, along with many of its G20 counterparts, has been a committed proponent of the "Base Erosion and Profit Shifting" or "BEPS" initiative of the Organisation for Economic Co-operation and Development (the "OECD"). The general focus of the BEPS initiative has been the development and implementation of various measures designed to curb (if not eliminate) certain tax planning strategies and practices of multinational enterprises ("MNEs") that are perceived to result in an inappropriate shifting of income to low-tax jurisdictions.

On the heels of the final BEPS project reports released on October 5, 2015, and Canada's endorsement of the recommendations developed under the BEPS project in November 2015, Budget 2016 proposes several legislative and administrative measures to respond to certain of the recommendations contained in the final BEPS reports, including: (A) the introduction of country-by-country transfer price reporting rules for certain MNEs, (B) a continuing review and evolution of the audit and assessment practices of the Canada Revenue Agency (the "CRA") in the transfer pricing area to ensure their ongoing consistency with the OECD's "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" (the "TP Guidelines"), (C) the introduction of measures for combating perceived treaty abuse, both on a bilateral and multilateral basis, including participation in the development of a multilateral instrument to streamline (and thus expedite) the implementation of certain treaty-related BEPS recommendations, and (D) the establishment of a spontaneous tax ruling exchange procedure with certain other participating jurisdictions. Each of these proposals is canvassed in further detail below.

Country-by-Country Transfer Price Reporting

The BEPS project report recommendations included the development of new standards for transfer pricing documentation to help better align transfer pricing reporting across jurisdictions and to provide tax administrations with improved information for purposes of conducting risk assessments and enforcement. In this regard, the TP Guidelines are being revised to include a minimum standard for country-by-country reporting, which Budget 2016 proposes to adopt for Canadian purposes. 

The country-by-country report will be a form that a large MNE will be required to file with the tax administration of the country in which the MNE's ultimate parent resides. Each country-by-country report will include the global allocation, by country, of key variables for the MNE, including revenue, profit, tax paid, stated capital, accumulated earnings, number of employees and tangible assets, as well as the main activities of each of its subsidiaries. Where a jurisdiction receives a country-by-country report from a member of an MNE, that jurisdiction is expected to automatically exchange that report with other jurisdictions in which the MNE operates, provided required agreements and protections are in place with the other jurisdictions and the other jurisdictions have implemented country-by-country reporting. Where Canada cannot obtain a country-by-country report in respect of a subsidiary resident in Canada from the jurisdiction in which the ultimate parent of the MNE resides, in certain cases, the CRA may require the subsidiary to file the relevant country-by-country report directly. (MNEs may be able to avoid multiple subsidiary filing requirements by designating one of its subsidiaries to be a "surrogate" for filing purposes, with the surrogate filing the country-by-country report on behalf of the entire MNE.

For Canadian purposes, the new country-by-country reporting requirements, which will be the subject of future draft legislation, will generally apply to MNEs with total annual consolidated group revenue of at least 750 million Euros. Where an MNE has an ultimate parent (or surrogate) that is resident in Canada, it will be required to file a country-by-country report with the CRA within one year of the end of the fiscal year to which the report relates.

Country-by-country reporting will be required for taxation years that begin after 2015, with the first exchanges between Canada and other participating jurisdictions expected to occur by June 2018.

Revised Transfer Pricing Guidance

Although the OECD's TP Guidelines are not explicitly incorporated into Canada's income tax legislation, they are routinely referred to and relied on by taxpayers, the CRA and the courts for purposes of interpreting and applying section 247 of the Income Tax Act (the "Tax Act"), and, in particular, for the guidance offered with respect to the application of the so-called "arm's length principle".

The recommendations arising from the BEPS project included certain revisions and clarifications to the TP Guidelines that are intended to provide "an improved interpretation of the arm's length principle" for purposes of achieving a higher level of congruence between the profits of MNEs, on the one hand, and the economic activities generating those profits on the other.

In addition to indicating its support for the changes to the TP Guidelines, Budget 2016 confirms the Government's belief that the CRA's current audit and assessing practices are consistent with the revisions and clarifications. It also indicates that revisions to CRA administrative practices may be forthcoming after certain follow-up work by BEPS project participants is completed respecting: (i) the development of a threshold for the proposed simplified approach to low-value added services, and (ii) clarifications to the definitions of "risk-free" and "risk adjusted returns" for minimally functional entities (often referred to as "cash boxes").

Curbing Treaty Abuses

Budget 2016 reaffirms, albeit without a specific implementation timeline, the Government's longstanding commitment to curb perceived treaty abuses, including, most notably, instances of so-called "treaty shopping" in the context of certain transactions involving non-resident parties. "Treaty shopping" is described in Budget 2016 as occurring where a person resident in a third-country creates an intermediary holding company in a treaty jurisdiction for purposes of channeling, through the company, income and gains sourced in Canada to access benefits granted under an applicable tax treaty that would not otherwise have been available to them.

Budget 2016 expresses the Government's intention to implement its treaty abuse objectives in a manner consistent with the mechanics contemplated by the "minimum standard" recommended in the BEPS project reports. Among other things, the BEPS "minimum standard" requires countries to include an express statement in their treaties of a common intention to eliminate double taxation, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Countries are also required to implement the common intention by way of either (i) a general anti-abuse rule in the treaty using the criterion of whether one of the "principal purposes" of a subject arrangement or transaction was to obtain treaty benefits in a manner that does not accord with the object and purpose of the relevant treaty provisions, or (ii) a specific anti-abuse rule requiring the satisfaction of a series of bright-line tests in order to qualify for treaty benefits (e.g., a rule similar to the limitation on benefits clause contained in the Canada-US Tax Treaty).

Budget 2016 reflects the Government's willingness to consider either of the foregoing approaches in the context of future bilateral treaty negotiations, "depending on the circumstances and discussions with Canada's treaty partners". In addition, and potentially of more immediate and significant impact, Budget 2016 confirms the Government's participation (along with other G20 countries) in the development, later in 2016, of the "multilateral instrument" contemplated by the BEPS project as a means of streamlining and expediting the implementation of the treaty anti-abuse rules described above (the multilateral instrument, as currently conceived, would be a tax treaty that multiple countries would sign modifying certain provisions of the bilateral treaties identified therein).

Spontaneous Exchange of Tax Rulings

In an effort to increase transparency and avoid what the Government describes as "mismatches in tax treatment" and "instances of double non-taxation", Budget 2016 adopts the BEPS project report recommendation to automatically exchange certain tax rulings with the revenue authorities of other jurisdictions which have adopted substantially similar measures and which have appropriate safeguards in place with respect to the protection of taxpayer information. Rulings subject to the automatic exchange regime will, according to Budget 2016, generally be those which could, in the revenue authorities' view, give rise to BEPS-related concerns in the event the exchange were not effected, and will include (but will not be limited to) rulings dealing with the following subject matter: (i) preferential regimes; (ii) cross-border unilateral advance pricing arrangements; (iii) downward adjustments to profits; (iv) permanent establishments; and (v) conduits.

It will be interesting to see what, if any, influence these new measures, scheduled to take effect in 2016, may have on taxpayer decisions going forward with respect to the seeking of advance income tax rulings.

Cross-Border Surplus Stripping

Section 212.1 of the Tax Act contains an anti-avoidance rule aimed at preventing certain non-resident shareholders in a Canadian corporation from (i) extracting (or "stripping") retained earnings (or "surplus") from the corporation in excess of the paid-up capital ("PUC") of the corporation's shares, or (ii) engaging in transactions designed to artificially increase the PUC of a corporation's shares. (PUC can generally be returned to non-resident shareholders free of withholding tax and is, thus, viewed as a valuable tax attribute.)

The anti-surplus stripping rule in the Tax Act will generally be engaged in circumstances where a non-resident taxpayer transfers shares in a Canadian corporation (known as the "subject corporation") to another Canadian corporation (known as the "purchaser corporation") with which the non-resident transferor does not deal at "arm's length". Under such circumstances, among other things, a deemed dividend that will be subject to non-resident withholding tax can result in the event the value of any non-share consideration received by the non-resident transferor exceeds the PUC attributable to the transferred shares.

Subsection 212.1(4) of the Tax Act provides an exception to the anti-surplus-stripping rule where (i) a Canadian purchaser corporation acquires shares of a non-resident corporation that itself owns shares of a Canadian corporation, thus creating a so-called "sandwich" structure (with the non-resident corporation being "sandwiched" between the two Canadian corporations), and (ii) the non-resident corporation subsequently disposes of the shares of the lower-tier Canadian corporation to the Canadian purchaser corporation (thus eliminating the "sandwich").

Budget 2016 indicates that the exception in subsection 212.1(4) has, in the Government's view, been inappropriately utilized by certain foreign-based corporate groups in the context of internal reorganization transactions designed to create sandwich structures with the primary purpose of increasing the PUC of a Canadian corporation's shares. While such previously undertaken transactions will, according to Budget 2016, continue to be challenged by the Government (including by way of assessment under the General Anti-Avoidance Rule contained in section 245 of the Tax Act), Budget 2016 proposes to amend subsection 212.1(4) for purposes of "clarifying" that the exception provided for therein will not be available in circumstances where, either at the time of the disposition or as part of a series of transactions that includes the disposition, a non-resident person both (i) owns, directly or indirectly, shares of the Canadian purchaser corporation, and (ii) does not deal at arm's length with the Canadian purchaser corporation.

In addition, Budget 2016 proposes to "clarify" (through new subsection 212.1(1.2) of the Tax Act), the application of the anti-surplus stripping rules in circumstances where it may otherwise be uncertain whether consideration has been received by a non-resident from a Canadian purchaser corporation in respect of the disposition of shares of a lower-tier Canadian corporation (which could include, for example, share transfers effected by way of a dividend in-kind or as part of a return of capital). In such cases, the non-resident will be deemed to have received non-share consideration from the Canadian purchaser corporation with a fair market value equal to the amount, if any, by which the fair market value of the lower-tier corporation's shares disposed of exceeds the amount of any increase, because of the disposition, in the fair market value of the shares of the Canadian purchaser corporation.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2016

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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions