As a member of both the OECD and G20, Canada has been an active contributor to the OECD’s work on BEPS.
In its 2017 spring budget, the Canadian government reiterated its commitment to implementing all of the minimum standards agreed to by all participants in the OECD’s BEPS project. In 2016, Canada enacted country-by-country reporting rules and is implementing the new common reporting standard starting on 1 July 2017. It also began the spontaneous exchange of tax rulings with other jurisdictions. Canada participated in the development of the multilateral instrument but has not yet signed it or indicated which of the instrument’s provisions it will adopt. It is unlikely that Canada will make sweeping changes to its domestic rules in 2017 related to the BEPS project. Canada’s existing foreign affiliate rules already provide a comprehensive CFC regime and it recently introduced complex back-to- back rules that apply to outbound payments of interest, royalties and similar payments for purposes of its thin capitalization rules and withholding tax.
The OECD Action Plan on BEPS clearly aligns with Canada’s longstanding goals to address base erosion in Canada. Well before the OECD’s current work began, Canada’s government saw a need to update its own international taxation principles. In 2008, the government appointed an international tax advisory panel of business and tax leaders to study the country’s international tax system. The panel’s final report set out a series of recommendations for tightening and improving the country’s tax rules.
Since then, Canada has adopted some of the panel’s recommendations by, among other things, tightening its thin capitalization rules, curbing foreign affiliate ‘debt dumping’ practices (i.e., investment by Canadian subsidiaries of foreign multinationals in other group companies as a mechanism to increase leverage or repatriate funds), introducing back-to- back rules for certain outbound payments and closing various loopholes in Canada’s international tax law. Implementation of other panel recommendations continues, but now these changes are being considered and positioned as in keeping with the OECD’s broader international project.
For example, in August 2013, Canada announced consultations on the possible adoption of an anti-treaty shopping measure. Canada has not yet finalized an approach to perceived treaty abuses, as the panel recommended. In its February 2014 federal budget, the Canadian government proposed a domestic general ‘main purpose’ treaty shopping rule, instead of a treaty-based approach that is being favored by the OECD. In the budget, the Ministry of Finance Canada stated that a treaty-based approach would be time consuming to implement and less effective than a domestic rule.
However, after consultations, the treaty shopping proposal’s implementation was suspended pending further work by the OECD and the G20 on its BEPS initiative.
Since the release of the OECD’s final reports, the Canadian government has not clarified whether it will continue to pursue a domestic anti-treaty shopping rule or instead rely on the OECD’s multilateral instrument (discussed below). In 2016, Canada introduced complex back-to-back rules that apply to outbound payments of interest, royalties and similar payments, which appear to be intended to prevent multinational companies from treaty shopping or interposing an intermediary entity to indirectly obtain treaty benefits. The rules also address the use of third-party intermediaries to access Canada’s domestic law exemption from withholding tax on arm’s length interest payments. Most of Canada’s recently negotiated treaties contain ‘main purpose’ anti-avoidance clauses in the dividends, interest and royalties article, and some also include a main purpose test in the capital gains article.
The Canadian government enacted country-by-country reporting in 2016 and has begun the spontaneous exchange of tax rulings with other jurisdictions.
In its March 2017 budget, the Canadian government did not propose any specific BEPS-related changes to its domestic legislation but reiterated its intention to ensure that its tax system meets all of the minimum standards agreed to under the OECD’s BEPS project. The budget confirmed the government’s view that Canada’s CFC rules are robust, which suggests that sweeping changes to its foreign affiliate regime are unlikely. The government also stated that it has committed to improve the efficiency and effectiveness of the MAP contained in its treaties.
Canada participated in the development of the multilateral instrument but has not yet signed the instrument or indicated which of the instrument’s provisions it will adopt. The government stated in its 2017 budget that it is undertaking the necessary domestic processes to pursue the signing of the multilateral instrument. The government also said that it is applying the revised international guidance on transfer pricing.
At the same time, the Canadian government is cooperating with other tax authorities worldwide to address international tax evasion, reinforcing their tax treaties with new agreements on the exchange of taxpayer information. Canada has 22 tax information exchange agreements in force, with another one signed but not in force and seven under negotiation.6
In 2016, Canada implemented the new common reporting standard starting on 1 July 2017 under the OECD’s Multilateral Competent Authority Agreement, which activated the automatic exchange of information between jurisdictions. This will allow for the first exchanges of information with other countries in 2018. In its 2017 budget, the government announced that it will put in place a national strategy to improve the availability of beneficial ownership information and strengthen the transparency of legal persons and legal arrangements.
On the administration side, the Canada Revenue Agency (CRA) has increased its international audit activity, with particular attention to transfer pricing audits. The CRA has identified aggressive tax planning (domestic and international) as one of the highest risks to its mandate to ensure taxpayers meet compliance obligations. Canada requires taxpayers, promoters and advisers to disclose specified tax avoidance transactions to the CRA. In its 2017 budget, the government announced 524 million Canadian dollars (CAD) of new funding for the CRA to boost its audit activity to uncover tax evasion and avoidance.
So what can international companies in Canada expect in terms of additional anti-BEPS related changes in the future? Sweeping change is unlikely, given the government’s longstanding focus on establishing a well-protected tax base while encouraging cross-border trade. In fact, in introducing its recommendations, the international tax panel of advisors that studied Canada’s international tax system in 2008 prefaced its discussion with a predominant view that “Canada’s international tax system is a good one that has served Canada well.”7
7 Advisory Panel on Canada’s System of International Taxation, Final Report — Enhancing Canada’s International Tax Advantage, (Ottawa: Department of Finance Canada, December 2008), at page 2.