International Issues In Taxation

 Residence  Taxation of non-residents on Canadian source income  Double taxation issues  Emigration and immigration  Foreign source income earned by residents © 2011, Clarence Byrd Inc.2

 The average Canadian individual whose job, family, dwelling place, and other personal property are all in Canada, would clearly be a Canadian resident and, as a result, he would be liable for Canadian taxation on his worldwide income. © 2011, Clarence Byrd Inc.3

Basic ties  Dwelling  Spouse or common-law partner  Dependants © 2011, Clarence Byrd Inc.4

Other Considerations  Personal Property  Social Ties  Economic Ties  Health Card, Driver’s License  Vehicle Registration  Passport  Canadian Unions Or Professional Associations © 2011, Clarence Byrd Inc.5

Taxation basis  Worldwide income  Pro rata for year © 2011, Clarence Byrd Inc.6

Entering Canada  Usual immigration rules  Other factors may be considered © 2011, Clarence Byrd Inc.7

Departing Canada: Latest Of:  Departure Date  Departure Of Spouse And Dependants  Establishment Of New Residence © 2011, Clarence Byrd Inc.8

1. Sojourners in Canada for 183 days or more. 2. Members, at any time during the year, of the Canadian armed forces when stationed outside of Canada. © 2011, Clarence Byrd Inc.9

3.Ambassadors, ministers, high commissioners, officers or servants of Canada, as well as agents general, officers, or servants of a province, provided they were Canadian residents immediately prior to their appointment. © 2011, Clarence Byrd Inc.10

4.An individual performing services, at any time in the year, in a country other than Canada under a prescribed international development assistance program of the Government of Canada, provided they were resident in Canada at any time in the 3 month period preceding the day on which those services commenced. © 2011, Clarence Byrd Inc.11

5.A child of a deemed resident, provided they are also a dependant whose net income for the year was less than the base for the basic personal tax credit ($10,527 for 2011). © 2011, Clarence Byrd Inc.12

6.An individual who was at any time in the year, under an agreement or a convention with one or more other countries, entitled to an exemption from an income tax otherwise payable in any of those countries, because at that time the person was related to, or a member of, the family of an individual who was resident in Canada. © 2011, Clarence Byrd Inc.13

 Incorporated In Canada After April 26, 1965  Deemed Resident © 2011, Clarence Byrd Inc.14

 Incorporated In Canada Before April 27, 1965  Deemed Resident If:  Was Resident At Any Time  Carried On Business In Canada © 2011, Clarence Byrd Inc.15

 Incorporated Outside Of Canada  Mind And Management Of Company © 2011, Clarence Byrd Inc.16

CChoices MManagement (Usual Determinate) BBeneficiaries AAssets © 2011, Clarence Byrd Inc.17

Employment In Canada Carried On Business In Canada Disposition Of Taxable Canadian Property © 2011, Clarence Byrd Inc.18

 ITA 2(3) – Non-residents taxed on employment income earned in Canada  ITA 115(2) – Deemed employment income  Teachers who continue teaching after taking up residence in another country  Non-residents remunerated from a Canadian source  Non-residents receiving signing bonuses for work to be performed in Canada © 2011, Clarence Byrd Inc.19

U.S. /Canada Tax Convention  $10,000 rule – no tax if less than $10,000  183 day rule – no tax if less than 183 days and not deductible in Canada © 2011, Clarence Byrd Inc.20

General Rules PProducing, growing, etc. SSoliciting orders DDisposing of certain types of property © 2011, Clarence Byrd Inc.21

U.S./Canada Tax Convention  Income taxable if a permanent establishment  Excludes certain facilities (e.g., storage facility)  An agent who can conclude contracts is viewed as permanent establishment. © 2011, Clarence Byrd Inc.22

Importance  ITA 2(3)  Gains On Dispositions Taxed In Hands Of Non-Residents © 2011, Clarence Byrd Inc.23

Real Property Partnership and trust if TCP is main value Private Company Shares (>50%) Public Company Shares (>25%) © 2011, Clarence Byrd Inc.24

U.S./Canada treaty limits to: CCanada real property PProperty that is part of a permanent establishment IInvestments whose value is primarily attributed to real property. © 2011, Clarence Byrd Inc.25

Non-residents earning Canadian source employment income, business income, or capital gains on taxable Canadian property are taxed under Part I Property income (interest, rents, royalties, and dividends) are generally subject to tax under Part XIII General rate is 25 percent – However, usually modified by tax conventions. © 2011, Clarence Byrd Inc.26

Interest Income - General  Part XIII is applicable only to  Interest on participating debt  Interest paid to non-arm’s length non- residents (unless exempt)  Most arm’s length interest is exempt © 2011, Clarence Byrd Inc.27

Interest Income – to U.S. residents  Part XIII no longer applicable © 2011, Clarence Byrd Inc.28

Royalties  In general, the Part XIII rate is 25 percent  U.S. /Canada Tax Treaty  Reduces rate to 10 percent  Reduces rate to nil for copyright and computer software royalties. © 2011, Clarence Byrd Inc.29

Rents  If in rental business – Part I applies  If not, Part XIII is assessed at 25% Problem: Part XIII is a flat tax on gross proceeds (no deductions) Solution: For real property rentals, non-resident can elect to be taxed under Part I (can deduct expenses) © 2011, Clarence Byrd Inc.30

Dividends  In general, dividends are subject to Part XIII at 25 percent  U.S./Canada tax treaty  Rate to 5 percent if U.S. recipient is a corporation and owns 10 percent or more of payor  Rate to 15 percent for other dividends to U.S. recipients © 2011, Clarence Byrd Inc.31

Retirement related benefits IIn general, subject to Part XIII SSome exceptions CCan also elect to be taxed under Part I UU.S./Canada tax treaty RRate reduced to 15 percent for periodic payments IIn general, OAS and CPP received by U.S. residents will only be taxed in the U.S. © 2011, Clarence Byrd Inc.32

Deemed Disposition Immediately Prior To Arrival Deemed Acquisition On Date Of Arrival © 2011, Clarence Byrd Inc.33

Deemed Disposition  General Rule  Exceptions  Real Property  Business Property  Excluded Personal Property  RPPs  RRSPs  DPSPs  Stock Options © 2011, Clarence Byrd Inc.34

ITA 128.1(4)(d) Election  Allows disposition to be elected when not required © 2011, Clarence Byrd Inc.35

Problems  Consistency between jurisdictions  Avoidance through treaties © 2011, Clarence Byrd Inc.36

Security For Tax  Tax Could Be Burdensome  Deemed Security On 1 st $100,000  No Interest On Amounts Secured © 2011, Clarence Byrd Inc.37

Unwinding a disposition © 2011, Clarence Byrd Inc.38 Maxine Howard leaves Canada on December 1, At that time, she owns shares of a private corporation with a FMV of $340,000 and an ACB of $220,000. As a result of the deemed disposition/reacquisition, she has a taxable capital gain of $60,000 [(1/2)($340,000 - $220,000). In 2012 she returns to Canada. She still owns the shares and they have a FMV of $430,000.

Unwinding A Disposition - At Departure POD$340,000 ACB 220,000 Capital Gain$120,000 © 2011, Clarence Byrd Inc.39

Unwinding A Disposition - On Return Election Under ITA 128.1(6)  Reverses Deemed Disposition On Departure  Amended Return  No Disposition On Departure – No Reacquisition On Return  Taxable Canadian Property Only © 2011, Clarence Byrd Inc.40

60 Months Or Less In Last Ten Years  No Deemed Disposition On Property Owned Before Last Becoming Resident  Still Applies To Property Acquired As A Resident © 2011, Clarence Byrd Inc.41

Like the situation with non-resident earnings Canadian employment income  $10,000 rule  183 day rule © 2011, Clarence Byrd Inc.42

Taxation based on presence of permanent establishments  If permanent establishment in source country, income will be taxed there  If no permanent establishment, income will be taxed in Canada © 2011, Clarence Byrd Inc.43

In general, the ITA rules apply without regard to the location of the property being sold U.S./Canada tax treaty gives the U.S. the right to tax gains on real property and property used in a permanent establishment © 2011, Clarence Byrd Inc.44

In general, Canadian residents are subject to tax on foreign source investment income Problems  Dividends: source company has not paid Canadian taxes  Compliance issues  Complexity issues © 2011, Clarence Byrd Inc.45

Foreign investment reporting requirements RRequired when total ACB > $100,000 IIncludes FForeign bank accounts SShares of non-resident corporations RReal property located outside of Canada EExcluded BBusiness property PPersonal use property SSubstantial penalties © 2011, Clarence Byrd Inc.46

Non-resident entities © 2011, Clarence Byrd Inc.47 Any type of organization (corporation, trust, or other) that is organized, continued, or governed under the laws of a country other than Canada

Non-Resident Entities  Types  Foreign affiliates  Controlled foreign affiliates  Foreign investment entities © 2011, Clarence Byrd Inc.48

Non-resident entities IIssues DDividends are paid from income that has not been taxed in Canada – solved by not getting tax credit EElimination of tax credit can result in double taxation IIncome may not be taxed in Canada until it is distributed © 2011, Clarence Byrd Inc.49

Foreign Affiliates  Taxpayer has an equity percentage of at least 1 percent  Taxpayer and related persons have at least 10 percent © 2011, Clarence Byrd Inc.50

Foreign Affiliates IIn general, only dividends from taxable Canadian corporations can be deducted under ITA 112(1) IITA 113(1) provides an equivalent deduction for dividends from foreign affiliates © 2011, Clarence Byrd Inc.51

Controlled Foreign Affiliates DDefined CControlled by Canadian resident ccontrolled by the Canadian resident, together with: ppersons (residents or non-residents) who are not at arm’s length with the Canadian resident; uup to four Canadian residents who are not related to the taxpayer (referred to as “relevant” shareholders; and aany other persons (residents or non-residents) who are related to the “relevant” Canadian shareholders. © 2011, Clarence Byrd Inc.52

Foreign Accrual Property Income (FAPI)  Includes  Property income of controlled foreign affiliate  Capital gains of controlled foreign affiliate  Becomes active business income if more than five full time employees  Income is taxed as it accrues  Dividends paid from FAPI can be deducted to offset tax paid on accrual © 2011, Clarence Byrd Inc.53

Foreign Affiliate Dividends  Requires surplus tracking  Exempt surplus  Taxable surplus  Pre-acquisition surplus © 2011, Clarence Byrd Inc.54

Foreign Affiliate Dividends – ordering rule  1 st from exempt surplus  Next from taxable surplus  Residual from pre-acquisition surplus © 2011, Clarence Byrd Inc.55

Foreign Affiliate Dividends – Deductible Amounts  100 percent if from exempt surplus  Limited amount from taxable surplus  Amount based on foreign tax amounts withheld  100 percent if from pre-acquisition surplus © 2011, Clarence Byrd Inc.56

Foreign Investment Entity: any non-resident entity, unless  It is a partnership;  It is an exempt non-resident trust;  Carrying value of investment property does not exceed one- half of the carrying value of all property; or  Its principal business is not an investment business. © 2011, Clarence Byrd Inc.57

Tax  Based on designated cost of investment  Rate = prescribed rate, plus 2 percent  Very harsh © 2011, Clarence Byrd Inc.58

In general, subject to foreign tax credit procedures See Chapters 11 and 12 © 2011, Clarence Byrd Inc.59

© 2011, Clarence Byrd Inc.60