Canada: Legal Trends 2016: Tax


Elected in October 2015, Canada's new Liberal government has proposed a tax platform featuring significant changes, including a four per cent increase (to 33 per cent) in the federal tax rate for individuals on income over C$200,000 and a 1.5 per cent drop in the middle-income tax rate. The new government has also pledged to limit the amount of employee stock-option gains eligible for capital gains treatment to C$100,000 per year. This could seriously impact many sectors, including the technology sector, which relies heavily on stock-option compensation. The Minister of Finance has advised that existing options will be grandfathered.

Other proposed changes include reversing the previous government's increase in the annual TFSA (tax-free savings account) contribution limit (reinstating the prior C$5,500 limit), reducing the small-business tax rate from 11 per cent to nine per cent and possibly imposing new limits on the types of corporations and businesses eligible for the small-business deduction.


In September 2015, the Organisation for Economic Co-operation and Development (OECD) issued its final reports on the Base Erosion and Profit Shifting (BEPS) initiative. These reports have received technical acceptance by the G20 countries and are generally expected to receive political acceptance as well. The reports recommend significant changes to the international tax landscape in such areas as permanent establishments, treaty shopping, interest deductibility, tax reporting and transparency. It will be interesting to see Canada's reaction to these recommendations, including whether the made-in-Canada anti-treaty shopping rule originally proposed in the 2014 federal budget will be resurrected.

The 2015 federal budget confirmed Canada's commitment to the new common reporting standard developed by the OECD in connection with the BEPS initiative for automatic exchange of financial account information with foreign tax authorities. On June 2, 2015, Canada became a party to a Multilateral Competent Authority Agreement with more than 60 other countries providing for coordinated implementation. The common reporting standard, which is based on the U.S. Foreign Account Tax Compliance Act (FATCA), will apply to Canadian financial institutions, effective July 1, 2017, with the first information exchange scheduled for 2018. Although the compliance requirements under the common reporting standard are expected to be substantially similar to those under FATCA, we will be monitoring the situation as more details are released.


Generally, intercorporate dividends are deductible by the recipient to prevent multiple levels of corporate income tax on corporate earnings. The 2015 budget proposed two significant changes to the treatment of intercorporate dividends.

The first change is a broadening of an existing anti-avoidance rule that generally converts tax-free intercorporate dividends into capital gains if one of the purposes of the dividend is to significantly reduce the capital gain that would otherwise be realized on a disposition of a share, except to the extent the dividend is paid from the corporation's "safe income on hand" (generally, after-tax retained earnings). The budget proposed to expand the "purpose" test that triggers the rule so that the rule will also apply if one of the purposes of the dividend is to significantly reduce a share's fair market value or increase the cost of property held by the dividend recipient, except in the case of deemed dividends from a share redemption, acquisition or cancellation of a share by the issuer. Arguably, this expanded purpose test could apply to almost any dividend regardless of whether the transaction was motivated by a desire to avoid tax.

The budget proposal also significantly limits application of the "within the group" exception often relied on for comfort that the existing rule does not apply to routine cash movements within a corporate group. Under the proposal, this exception will only apply to deemed dividends resulting from a redemption, acquisition or cancellation.

If enacted as proposed, this amendment will add substantial cost and complexity to the movement of cash within Canadian corporate groups. The proposal's impact can already be seen in intercorporate dividend transactions that have occurred since the budget announcement. Many such transactions are now being structured to trigger deemed dividends on share redemptions so that the "within the group" exception can still be relied on. The Canada Revenue Agency has offered some administrative comfort that it will not seek to apply the new rule to ordinary course dividends paid by public corporations pursuant to an established dividend policy, but the specific contours of this administrative policy are not clear.

The second change targets structures in which Canadian financial institutions provide synthetic exposure to Canadian dividend-paying shares to Canadian tax-exempt entities (such as Canadian pension funds) or non-residents through derivatives such as total return swaps. In these structures, the financial institution deducts the dividend-equivalent payments on the swap and claims an intercorporate dividend deduction with respect to dividends received, resulting in a loss for tax purposes. The budget indicated that these arrangements significantly erode Canada's tax base because the counterparties are not subject to Canadian income tax on dividend-equivalent payments received.

Under the budget proposal, such a "synthetic equity arrangement" will be subject to the existing "dividend rental arrangement" rules, and accordingly, dividends received on a share that is the subject of such an arrangement will no longer be eligible for the intercorporate dividend deduction. This rule is proposed to apply to dividends paid after October 31, 2015, subject to limited grandfathering until May 2017 for arrangements entered into before the budget announcement.

Although, to date, the new government has not made any announcements regarding whether it intends to move forward with these proposed measures, they will likely be implemented in some form.​​

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.

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.

Events from this Firm
27 Oct 2016, Seminar, Toronto, Canada

Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.

1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

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.