Canada: Canadian Tax @ Gowlings – July 2007

Last Updated: August 21 2007

Edited by Vince Imerti

  • Treaty Shopping and the GAAR Revisited
  • Update of Canadian Interest Deductibility Proposals
  • Canadian Immigration Trusts

Treaty Shopping and the GAAR Revisited

We recently reported (see Volume 3, Number 3 of this publication) on a decision of the Tax Court of Canada in the case of MIL (Investments) S.A. relating to an attempt by the Canada Revenue Agency ("CRA") to apply the so-called "general anti-avoidance rule" or "GAAR" to a case of alleged abusive treaty shopping. The decision of the Federal Court of Appeal in the appeal by the CRA of the Tax Court of Canada decision was recently released.

As reported earlier, the Canadian courts have consistently held that in order for the GAAR to be applicable to deny a "tax benefit" that arises from a transaction or series of transactions, a number of tests must be satisfied including, in general terms, that the impugned transaction or transactions give rise to a misuse of the provisions of the Canadian tax act or an abuse having regard to the provisions of that act read as a whole. The decision of the Federal Court of Appeal was direct and succinct in this regard. The Court stated that it was "unable to see in the specific provisions of the [Canadian Tax Act] and the [Luxembourg-Canada] Tax Treaty…any support for the argument by the [Canada Revenue Agency] that the tax benefit obtained by the [taxpayer] was an abuse or a misuse of the object and spirit of any of those dispositions". The Court went on to say that "[the CRA] urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose".

It seems that in what can fairly be described as an extremely brief and clear judgment, the Federal Court of Appeal has confirmed that it will be extremely difficult for the CRA to try to successfully apply the GAAR to what it might perceive to be abusive treaty shopping.
By: Tim Wach

Update of Canadian Interest Deductibility Proposals

In the 2007 Federal Budget (delivered March 19, 2007) the Minister of Finance announced that new legislation would be introduced to restrict the deductibility of interest on funds borrowed by a Canadian corporation to finance a "foreign affiliate". The concern, according to the Minister, was that corporations should not be able to deduct interest on money used to earn income that is effectively exempt through Canada's form of participation exemption.

Under the original Budget proposal, corporatins would have been denied a current interest deduction for interest paid on money borrowed to finance foreign affiliates to earn "exempt dividends" ("exempt dividends" are those paid out of a foreign affiliate's "exempt surplus", which includes in particular active business income of the foreign affiliate from a country with which Canada has concluded a double taxation treaty). This deduction was to be replaced with a carry-forward amount that could be deducted in future years to the extent that the foreign affiliate generates non-exempt income for the Canadian corporation (in other words, income, including capital gains, other than exempt dividends received out of the exempt surplus). The new proposal was to take effect on a staggered basis between 2007 and 2009.

The original announcement was ill conceived and generated a storm of protest from business and from tax professionals. As a result, on May 14 the Minister of Finance announced changes to the original proposal. The substituted proposal is more targeted than in the Budget but also more arbitrary, denying a deduction only for an amount referred to as "double dip" income. This requires a calculation of the foreign affiliate's income "attributable to" certain specified debts owing to the foreign affiliate, and will vary according to the amount of foreign income taxes paid in respect of that income. Furthermore, the proposal will now apply only to taxation years beginning in 2012.

The changes, while welcome, were accompanied by justifications that backtracked significantly from the rationales originally advanced by Finance to support the proposal. Instead, the stated purpose of the revised proposals is an attack on "double-dip" and so-called "tower structures" designed to generate interest deductions in offshore jurisdictions as well as in Canada. It is our understanding, from our conversations with various interested parties, that Finance's primary concern is so-called "second-tier financing" structures in which Canadian subsidiaries of foreign parents borrow to further finance other entities in the corporate group. Although we feel that (for various reasons) the attack on "double-dip" and "tower structures" is without policy merit, Finance appears to be digging in its heels to preserve some sort of proposal, even if it has little in common with the original proposal.

It was also proposed that a committee of Government officials and tax professionals study this matter further. However, given some of our recent experience with new and sweeping legislation dealing with international tax concepts in Canada, it may be that these amendments (which do not yet even have the form of draft legislation) will never see the light of day in the current proposed form. At the very least, further thinking and further amendments will almost certainly be needed.
By: Craig Burley

Canadian Immigration Trusts

Like many other jurisdictions, Canada has a set of tax rules aimed at taking the tax advantage for Canadian taxpayers out of holding passive investments through offshore or "non-resident" trusts. As previously discussed in this publication, Canadian non-resident trust rules are the subject of a set of recently enacted (but not yet proclaimed or in force) amendments to the Income Tax Act that intended to broaden their application. However, it is significant to note that the "Immigration Trust", long a feature of the Canadian tax system, will continue to be available as a tax-planning device.

The Immigration Trust was originally intended to provide relief to foreign executives transferred to Canada on a temporary basis. Because Canada taxes residents on their world-wide income, a foreign executive transferred to Canada, even on a temporary basis would, in most cases, be subject to Canadian tax on income from all sources, including from passive investments in their home jurisdiction. A properly structured Immigration Trust (and there are many technical "traps" that must be avoided) provides relief from this impact for up to five years being, effectively, the maximum period that such trusts are exempted from the former and the new non-resident trust rules.

The benefits of an Immigration Trust are not limited to foreign executives, however, and can be of benefit to anyone emigrating to Canada, including individuals moving here permanently. The essential elements of Immigration Trust planning are as follows:

  • There must be a trust settlement by the immigrating individual at some time that is prior to the expiry of the first 60-months of residence in Canada. The settlement of the trust should typically occur prior to the immigrating person taking up Canadian residence. Although the trust can be settled at any time within the first 60-months of residence, if it is settled while the immigrating person is a resident of Canada, the settlement itself will be a realization for Canadian tax purposes and any capital gains that have accrued since the date of immigration will be taxable in Canada.
  • The trust must be, under normal principles, a non-resident of Canada. This means, at the least, that the majority of trustees is not resident and that the trust is not otherwise controlled by residents of Canada. The trust residence should be established in a jurisdiction that itself does not tax the trust income. The tests for establishing the residence of a trust under Canadian tax law are somewhat fluid; care should therefore be taken in the design of the trust's governance to avoid the argument by the Canada Revenue Agency that the persons who truly control the trust, and therefore the trust itself, are resident in Canada.
  • The beneficial interests in the trust should generally be discretionary. Further, to avoid Canadian taxation altogether, only trust capital should be paid to Canadian resident beneficiaries since any trust income they receive will be taxable to them in the year it is paid or payable to them.
  • Proper planning is required to avoid the application of the attribution rules contained in the Income Tax Act. These rules can apply to attribute the income and the capital gains of at trust to the person who has gifted or loaned property to the trust in various situations, including situations where the beneficiaries of the trust are the person's spouse, their children under the age of 18 and other persons who are not at arm's length to them. These attribution rules are of general application and could, in the absence of proper planning, apply to defeat the point of the immigration trust.
  • The trust may invest its property anywhere. If it invests in Canadian investments, however, it will be liable to pay Part XIII withholding tax on the investment income from Canadian sources.
  • If the trust can be considered to be carrying on business in Canada or to be disposing of taxable Canadian property, it will also be subject to Part I tax.
  • Prior to the end of the 60-month period, the trust should consider changing its residence to Canada. This can be done simply by changing the trustees to Canadian resident trustees. For Canadian tax purposes, the trust will have a non-taxable deemed disposition of all of its property and obtain a step-up of the cost base of its property. If there is trust property with inherent losses, consideration should be given to distributing the property to Canadian resident beneficiaries in order to preserve the losses for later realization.
  • The trust will be treated under Canadian income tax law as a non-resident trust. Canadian resident contributors and beneficiaries are therefore subject to the foreign property reporting rules.

Clearly, anyone contemplating a move to Canada, whether on a temporary basis or a permanent basis, should consider establishing an Immigration Trust.
By: David Stevens

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
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

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.