Review of Canadian tax developments in 2020
2020 was far from normal as the global COVID-19 pandemic presented both human and tax challenges in Canada and abroad. Federal government attention was firmly on the pandemic for most of the year, and it wasn't until November that tax legislation was released that did not respond directly to the crisis. Although that legislation included a significant new revenue increase in the form of changes to the GST / HST rules related to cross-border e-commerce, it remains to be seen how the government will handle a projected record deficit of 1% over $ 381 billion Dollars for 2020-21.
In an otherwise eventful year, 2020 was a quiet year for tax law. As a rule, the federal government presents an annual budget in the spring of each year, which is usually followed by the provincial budgets. The time for this year coincided with the start of the COVID-19 pandemic. Although the provinces gave up their budgets, the federal government has deferred its own budget to focus on Canada's response to the pandemic. This response included a number of pieces of legislation to help businesses and individuals, such as a wage subsidy for employers in the form of the Canadian Emergency Wage Subsidy (CEWS); Direct payments to eligible individuals and employees under the Canada Emergency Response Benefit (CERB) and Canada Recovery Benefit (CRB); interest-free, partially forgivable, small business and nonprofit loans through the Canada Emergency Business Account (CEBA); and commercial rent relief under the Canada Emergency Commercial Rent Assistance (CECRA) and later the Canada Emergency Rent Subsidy (CERS). The government has estimated the total cost of the COVID-19 response in terms of direct tax and health interventions, deferred revenue and accelerated spending at approximately $ 407 billion, nearly 19% of GDP.
It was not until November 30, 2020 that the federal government published a mini-budget under the guise of the autumn economic declaration. This provided details on extending the COVID-19 relief laws through 2021, including the CEWS. A small number of tax changes have also been proposed, such as the previously announced changes in the taxation of employee stock options and new sales tax rules for the digital economy.
The federal corporate and personal tax rates remained unchanged. On the provincial side, Alberta passed corporate tax cuts in 2019, which will see the general corporate tax rate drop to 8% from 2022 (up from 9% in 2021). In its provincial budget for 2020, Québec announced that from 2021 it will reduce its corporate tax rate to 2% (from 11.5% today) on patent fees and to up to 75% of profits from certain other forms of certain IP-related income. provided that the taxpayer concerned has carried out Scientific Research and Experimental Development (SR & ED) in Québec and that all or part of the commercialized intellectual property results from SR & ED in Québec.
Taxation of employee stock options
In the Fall Economic Declaration, the previously announced changes to the taxation of employee stock options that are intended to apply to certain options granted on or after July 1, 2021 have been updated. Under current regulations, employees of companies and mutual funds that issue shares will be issued Options can access preferential personal income tax treatment (50% normal tax rates) in the form of a qualifying stock option benefit deduction (option deduction) that tracks the capital gains rate.
The proposed rules limit the availability of the option deduction for options with the same vesting year insofar as the fair value of the securities under the options at the time the options are granted exceeds $ 200,000. If the year of exercise is unclear at the time of granting, it is assumed that the option will vest on a pro rata basis over the term of the option contract up to a maximum of five years. The Fall Economic Statement proposals also limit the charitable deduction available for stock options to the same extent as the option deduction so that an employee can only benefit from the charitable deduction for securities of $ 200,000.
Options granted by Canadian Controlled Private Corporations (CCPCs) and non-CCPCs whose gross annual sales do not exceed US $ 500 million are not subject to option withdrawal restrictions.
The proposals allow employers to request a deduction in relation to the stock option benefits included in their employee's income, provided workers are not eligible for an option deduction due to the $ 200,000 limit.
Changes in sales tax in relation to the digital economy
In the autumn economic declaration, detailed changes to the sales tax rules for e-commerce transactions were proposed with effect from July 1, 2021. The suggestions are specifically aimed at digital sales and websites that advertise short-term accommodations.
- Cross-border digital products and services. The proposed rules require that non-resident suppliers who are not physically present in Canada and sell digital products or services to Canadian consumers, register for GST / HST and collect and remit taxes on taxable sales to Canadian consumers. The registration, collection and transfer of GST / HST is currently not required by these providers. A simplified GST / HST regime would apply to these companies.
- Online marketplaces and fulfillment warehouses. Distribution platform operators (and non-resident suppliers who do not sell through a distribution platform) would be required to collect and remit GST / HST for sales to Canadian buyers by unregistered suppliers of goods delivered from a fulfillment warehouse or other location in Canada . In addition, distribution platform operators and fulfillment warehouses would need to provide the Canada Revenue Agency (CRA) with certain information and keep records of their non-resident customers.
- Short term rental accommodation. GST / HST would apply to all platform-based short term rentals offered in Canada. The burden of collecting and transferring GST / HST would be borne either by the owner of the property if registered for GST / HST or by the digital accommodation platform if the owner is not registered. A simplified GST / HST regime would be available to non-resident operators of accommodation platforms who do not do business in Canada.
Canada Emergency Wage Grant
The CEWS, which was launched in April 2020 in response to the pandemic, grants qualified employers a grant for wages paid to workers. When it was first introduced, it was planned to run for 12 weeks from March 15th to June 6th. A subsidy of up to 75% of wages was granted for employers who recorded a 70% decline in sales compared to the same period before – pandemic. During the year the program was expanded and modified, with wider application and different rates applied depending on the extent of the employer's income reduction. A detailed discussion of the CEWS can be found in our Notice.
With the autumn economic declaration, the CEWS was further extended until June 2021. For the period from December 20, 2020 to March 13, 2021, all eligible employers who experience a decline in sales are entitled to a subsidy of up to 65% of the eligible wages with a base subsidy of up to 40% of the eligible wages and an additional Top-up subsidy of up to 35% for employers with a decrease in turnover of 70% or more.
Details of the wage subsidy for a period after March 13, 2021 will be announced at a later date.
Temporarily extended deadlines under the Income Tax Act and Excise Tax Act
On August 31, 2020, the Minister of Finance issued orders to extend various periods within the framework of the Income Tax Act (ITA) and the Excise Tax Act (ETA) due to new powers granted to the Minister under the Law on Deadlines and Other Periods (COVID-19) (Time Limits Act), which received royal approval on July 27, 2020.
According to ministerial regulations, the deadline within which the rating agency can carry out re-evaluations has been extended by six months or until 31 December 2020, whichever is earlier, in terms of years or periods otherwise under ITA or ETA would be statute barred or after May 20, 2020. These ministerial ordinances are no longer in force and no further extensions have been announced.
Relief for late-filed notice of objection
The one-year deadline for late objection requests has also been extended. The deadlines for requests for relief, which otherwise would have expired between March 13 and September 13, 2020, have been extended by the earlier six-month period from the normal request for relief and December 31, 2020. The same extension also applied to the period during which a taxpayer or registrant may appeal in the Canadian Finance Court's refusal by the Minister to grant such an extension. No further expansions were announced here either.
Canada's answer to international tax questions raised by COVID-19
On May 19, 2020, the rating agency issued Guidelines on international income tax issues raised by the COVID-19 crisis (Guidelines) detailing potential Canadian income tax issues due to pandemic-related travel restrictions and the proposed response to those issues.
Income tax residence: individuals and companies
With regard to the common law test of tax residence, the guide provided the following Individuals will not be considered resident for tax purposes in Canada solely based on the fact that they physically remained in Canada due to COVID-19 related travel restrictions. Similarly, when calculating the 183-day threshold for taxable residence, the rating agency confirmed that it did not take into account days that the individual was present in Canada and could not return to their country of residence solely because of travel restrictions.
To the Companies living in Contracting CountriesDouble corporate residence is usually resolved by applying a "tie-breaker rule" to the residence that takes into account: including the place of effective management of the company. Under the guidelines, such companies should not be considered Canada based solely because a director attended a board meeting from Canada due to COVID-19 travel restrictions. Findings on the place of residence of companies in which potential double residents of are involved Non-contracting countries will be determined on a case-by-case basis.
These administrative concessions ran from March 16 to September 30, 2020. It is unclear whether they will be renewed if travel restrictions are tightened again in response to the second wave of COVID-19.
Business activity and permanent establishments
inhabitant of Contracting Countries are taxable in Canada only if their business is conducted through a Canada Resident Permanent Establishment (PE). The guidelines provided that for the period between March 16 and September 30, 2020, a non-resident facility would not be considered a PE in Canada simply because its employees had to perform their work duties in Canada due to travel restrictions. The guidelines also provide similar relief in circumstances where the non-resident entity may have either an agency PE or a service PE due to travel restrictions (e.g. Article V (5) and Article 9 (9)) (a) of the Canadian -american tax agreement). For residents of Non-contracting countriesThe rating agency stated that it would decide on a case-by-case basis whether administrative relief was appropriate.
The Canada-US tax treaty provides (in Article XV, Section 2) a limited safe haven for US residents of Canada that exempts them from Canadian tax on their Canadian labor income if the income does not exceed $ 10,000 or they do do not exist in Canada for more than 183 days in a 12 month period and the income is not supported by a PE. Due to COVID-19-related travel restrictions, certain U.S. employees who do regular work in Canada may have to remain physically present in Canada beyond the 183-day limit. The guidelines confirmed that the days on which these people were physically present in Canada due to travel restrictions are not included in the calculation of the 183 day period. Similar administrative measures would also apply when calculating the Days of attendance test in relation to employees who have their habitual residence in other contracting countries.
Similarly, non-resident employers with Canadian residents are required to deduct withholding taxes at source regardless of where the placement services are provided. However, such withholding can be reduced by obtaining a Letter of Authority (LOA) from the rating agency that takes into account all foreign taxes payable by the Canadian employee. In the event that such Canada-based employees – who had previously received a 2020 LOA – were exercising their employment obligations from Canada due to travel restrictions, they would still benefit from the reduced source Canadian withholding taxes specified in the LOA.
Finally, the guide also provided that the rating agency should not judge or penalize a non-resident employer for failing to withhold the required Canadian wage deductions in 2020. Certain criteria must be met in order to benefit from this action, including demonstrating that the employee does not. He is ordinarily resident in Canada and his remuneration would otherwise be exempt from tax in Canada under a tax treaty. It should be noted that, unlike the other measures set out in the guidelines, this management license may be valid until 31 December 2020.
Supreme Court decision on derivatives in MacDonald
The Supreme Court of Canada (SCC) has upheld the decision of the Federal Court of Appeals (FCA) in MacDonald v The Queen, on whether a derivative contract entered into by the taxpayer was a capital account hedge or, alternatively, a speculative income account investment.
The taxpayer owned a large number of Bank of Nova Scotia (BNS) shares which he held in capital account. He received a credit facility from Toronto-Dominion Bank on which he was required to mortgage the BNS shares as partial security and to enter into a cash-settled futures contract for a large number of BNS shares. If the price of BNS shares rose, the futures contract would lose value. If the price went down, the contract would increase in value. As it turned out, the price of BNS shares rose, the taxpayer contracted over time and suffered a loss. The taxpayer took the view that the loss was income-related because he intended to use the futures contract for speculation and not hedge the risk.
The SCC disagreed and thought the futures contract was a hedge. Since the BNS shares were held in the capital account, the loss was a capital loss. In reaching this conclusion, the Court acknowledged that a taxpayer's stated intentions are relevant in determining whether a derivative contract is a hedge, but stressed that objective evidence of a taxpayer's intentions is generally more convincing. In relation to hedging, the primary evidence for the purpose of a derivative contract is the degree to which the contract mitigates the associated economic risks of the asset, liability or transaction that it is alleged to be hedging. The more effectively a derivative contract mitigates or neutralizes such economic risks, the more it can be concluded that the purpose of the contract is to hedge these risks.
In concluding that the futures contract acquired by Mr. MacDonald was a hedge, the SCC considered two related facts: the contract almost perfectly neutralized the price fluctuations of BNS shares and, from the perspective of Toronto-Dominion Bank, this meant that the value of the collateral was for the loan was protected from market fluctuations. The fact that he did not sell his BNS shares to make up for the losses did not, in the SCC's view, break the link between the contract and the underlying shares.
In determining whether a taxpayer intends to use a derivative contract to hedge an underlying asset, liability or transaction, the decision of the SCC is made in MacDonald represents a significant shift in the extent to which the contract mitigates or neutralizes the economic risks associated with the asset, liability or transaction. The SCC ruling found that the burden of proof in establishing a taxpayer's intent is primarily determined by the objective factors that determine whether the derivative contract materializes the economic risks of an underlying asset, liability or transaction mitigates even if those risks are those that the taxpayer did not intend to cover. In a protracted contradiction, Justice Côté expressed concerns that this postponement will create uncertainties in the tax treatment of derivative contracts. It remains to be seen how the rating agency will apply the principles set out in the majority decision.
Benefits of the tax treaty confirmed in Alta Energy
The FCA made its judgment in Alta Energy Luxembourg SARL v The Queen, which affirmed the decision of the Tax Court of Canada (TCC) that contractual benefits asserted by a Luxembourg special purpose company for the sale of shares in a Canadian oil and gas company do not constitute improper contractual purchases within the framework of Canada were domestic general anti-avoidance rule. Alta Energy was decided when Canada officially ushered in a new era of international coordination within the OECD Multilateral agreement on the implementation of fiscal measures to prevent ground erosion and profit shifting (MLI), which is in effect for Canada's tax treaties with many other ratifying countries for withholding taxes on January 1, 2020 and for other taxes (including capital gains taxes) for tax years beginning on or after June 1, 2020. The SCC has appealed the FCA's ruling.
Transfer pricing re-characterization rejected in Cameco
The FCA got its ruling in the Cameco Corporation v Canada Transfer pricing case confirming TCC's decision in favor of the taxpayer. Cameco is a major producer and supplier of uranium that is bought and sold on an unregulated market under bilateral agreements, but is not traded on a commodity exchange. The taxpayer had long-term contracts with its European subsidiary to buy and sell uranium at fixed prices. Due to the resulting market price increases, the subsidiary made substantial profits.
The case concerns the interpretation of the re-characterization rule in Canadian transfer pricing legislation. Before the FCA, the Crown argued that the minister could book the profits of the European subsidiary in Cameco's hands because Cameco would not have completed the transactions he had made with a person on market terms. In rejecting this submission, Webb JA noted that the relevant test under the transfer pricing rules is whether or not the transaction would have been completed between individuals who negotiated on market terms (an objective test based on hypothetical individuals) whether the respective taxpayer would have completed the transaction with an independent party (a subjective test).
The FCA recognized the exceptional nature of the transfer pricing re-characterization rule and noted that the minister would not be able to simply redirect all profits of a foreign subsidiary to the Canadian parent company because the Canadian company would not have transacted with its foreign subsidiary, if they had negotiated with one another at normal market conditions. The crown has asked the SCC for permission to appeal against the FCA's decision.
Transfer pricing for cross-border services confirmed in Agra City
The judgment of the TCC in AgraCity Ltd. against The Queen This is another loss for the Minister in his increasingly aggressive transfer pricing challenges. The taxpayer, a Saskatchewan-based company, was a member of an agricultural buying group that supplied Canadian farmers with agricultural produce. The group formed a subsidiary in Delaware to purchase a US-made glyphosate-based herbicide from third-party US suppliers for resale to Canadian farmers. Although the herbicide was not approved for sale in Canada, it was able to be imported into Canada under a special program established by the federal government to allow Canadian farmers to purchase designated herbicides for personal use from non-Canadian sources. As explained below, non-Canadian suppliers (originally the Delaware subsidiary) are prohibited from offering the herbicide to farmers in Canada who had to contact suppliers in the United States. Much of that import and resale business was subsequently transferred to a newly established subsidiary in Barbados to lower US taxes paid on profits from sales to Canadian farmers. In the years in question, the taxpayer provided logistics services to both the Delaware and Barbados companies for service fees.
The minister challenged the service relationship between the taxpayer and the Barbados subsidiary on the grounds that it was a sham designed to hide the fact that all income generating activities were instead carried out by the taxpayer. In the alternative, the Minister reassessed the complainant under the ITA's transfer pricing rules, as all of the Barbados subsidiary's profits from its sales to Canadian farmers were to be reallocated to the taxpayer.
The TCC rejected all of the minister's arguments. In relation to the Minister's bogus theory, it was clearly demonstrated that the taxpayer had not fraudulently misrepresented the rights and obligations of the parties and that the importation and resale of the herbicide to Canadian farmers was actually carried out by the subsidiary in Barbados with the taxpayer providing Ancillary services. The Court gave particular importance to the fact that the regulatory system for importing the herbicide into Canada made some form of foreign subsidiary structure essential to the business, as it was illegal for anyone to offer the herbicide for sale in Canada or to sell in Canada . Further, the Court found that the disputed transactions between the taxpayer and the Barbados subsidiary were economically reasonable in view of the tasks performed by each party and accepted expert evidence that the fees charged by the taxpayer for its services were within the market range of prices . The Minister has not appealed the decision to the FCA.
Offshore banking structure confirmed in Loblaw
The FCA decision in Loblaw Financial Holdings versus The Queen Concerned whether a Barbados subsidiary in the Loblaw Group, Glenhuron Bank Limited (GBL), was engaged in "investment business" within the meaning of the "overseas subsidiary" rules. The TCC had concluded that this was the case. On that basis, GBL's income was "Foreign Accrual Income" (FAPI) and, as such, had to be included in the income of its parent Canadian company on an accrual basis. The case revolved around the interpretation of the regulated foreign bank exception, which provides that a business conducted by a regulated foreign bank is not an investment business if certain conditions are met. Although changes were made to the regulated exemption for foreign banks with effect from 2015, GBL would have denied access to the exemption if the changes had been applied in the years in question Loblaw remains relevant for a number of reasons.
GBL has been involved in various financing activities that have been funded with a combination of capital from members of the Loblaw group of companies and retained earnings. The only question before the FCA was whether the TCC was wrong to conclude that GBL did not do business primarily with independent persons for the purposes of the definition of investment business. The TCC had based its conclusion on the fact that GBL had received its funding from persons on non-market terms. Since it believes that a bank's business extends to both the receipt and use of funds, the non-market nature of such evidence should be taken into account. While essentially all investments made by GBL were made to people customary in the market, TCC framed GBL's activities in such a way that GBL was doing business for its parent company and not for its own account.
The FCA rejected both positions. Regarding the nature of a banking transaction, the FCA considered that there was no basis on which to conclude that arm's length testing requires both the receipt and use of funds and capital in relation to the particular circumstances of the case. Investments received from companies were not part of GBL's business. This conclusion is consistent with the long-standing distinction between the capital that enables a person to run their business and the activities that make them earn their income. On the second point, the FCA found that the TCC failed to respect the distinction between a company and its shareholders when it found that GBL was acting on behalf of its parent company in the course of its business. While the parent may have provided instruction and supervision, this did not mean GBL was doing business either with or for his parent.
The FCA therefore concluded that GBL was doing business with independent persons and that its income was therefore not FAPI. In October 2020, however, the SCC gave the crown permission to appeal.
Canadian tax development outlook for 2021
The lack of a federal budget in 2020 has raised expectations for the 2021 budget, which will hopefully get Canada out of the COVID-19 pandemic. The upcoming budget will most likely continue the government's policy of providing massive boost to help Canada get out of the economic aftermath of the pandemic. The budget could also include some revenue boosting measures to address the government's growing deficit.
Better to deconstruct
In der Herbst-Wirtschaftserklärung wurde ein Investitionsplan für die Erholung Kanadas auf der Grundlage von Post-Pandemie-Konjunkturausgaben in Höhe von 70 bis 100 Milliarden US-Dollar über drei Jahre festgelegt. In ihrer Thronrede vom 23. September 2020 verpflichtete sich die Bundesregierung, „besser wieder aufzubauen, um ein stärkeres und widerstandsfähigeres Kanada zu schaffen“, um der existenziellen Bedrohung durch den Klimawandel zu begegnen. Derzeit ist noch nicht bekannt, wie die Regierung diese versprochene grüne Erholung einleiten will, aber es ist wahrscheinlich, dass die Finanzpolitik ein wesentlicher Treiber dieser Initiativen sein wird.
(Anmerkung des Herausgebers: Klicken Sie auf den folgenden Link, um den entsprechenden Artikel herunterzuladen: "Kommt ein grüner neuer (Steuer-) Deal nach Kanada?", Der ursprünglich in Tax Notes International von den Davies-Anwälten Gregg Benson, Michael Kandev und James Trougakos veröffentlicht wurde.)
Das ITA enthält derzeit vier Steueranreize, die speziell zur Förderung von Investitionen in „grüne“ Energieerzeugungsprojekte entwickelt wurden:
- ein beschleunigter Kapitalkostenzuschusssatz für bestimmte Geräte zur Erzeugung sauberer Energie;
- einen sofortigen Abzug für bestimmte Ausgaben, die bei der Entwicklung von Projekten zur Erzeugung sauberer Energie oder „grüner Energie“ anfallen;
- einen Flow-Through-Aktienmechanismus, mit dem Hauptunternehmen auf bestimmte Ausgaben für ihre Aktionäre verzichten können, damit diese Aktionäre andere Einnahmequellen schützen können; and
- die 10% ige atlantische Investitionssteuergutschrift, die für die Kapitalkosten bestimmter vorgeschriebener Energieerzeugungs- und -erhaltungsimmobilien gilt.
Mögliche Verbesserungen dieser Maßnahmen, die im Bundeshaushalt 2021 enthalten sein könnten, könnten Folgendes umfassen:
- Erstens ist die beschleunigte Kapitalkostenpauschale derzeit nur für Unternehmen mit erneuerbaren Energien nützlich, die bereits rentabel sind. Darüber hinaus ist seine Verfügbarkeit auf die Einnahmen aus Immobilien für erneuerbare Energien oder aus einem Geschäft beschränkt, das das Produkt dieser Immobilien verkauft. Eine Möglichkeit, diesen Anreiz zu erweitern, besteht darin, ihn generell von anderen Einnahmequellen abzugsfähig zu machen, auch durch eine Partnerschaft. Dies würde im Einklang mit der US-Steuerpolitik stehen, Flip-Partnership-Strukturen zuzulassen.
- Zweitens könnte der kanadische Abzug von Kosten für erneuerbare Energien und Naturschutz, der effektiv eine Erweiterung des kanadischen Explorationskosten-Systems für Öl und Gas darstellt, im Einklang mit den Abzügen erweitert werden, die dem Öl- und Gassektor zur Verfügung stehen. Dies würde auch das Potenzial für Flow-Through-Aktienfinanzierungsgeschäfte von Unternehmen für erneuerbare Energien erhöhen.
- Drittens könnte die 10% ige atlantische Investitionssteuergutschrift für erneuerbare Energien möglicherweise auf den Rest des Landes ausgedehnt oder in eine neue Kategorie von Investitionssteuergutschriften für erneuerbare Energien übertragen werden.
Mögliche umsatzsteigernde Maßnahmen
In den letzten Monaten wurde viel Tinte verschüttet, um darüber zu spekulieren, wie und wann die Regierung Einnahmen erzielen wird, um die außerordentlichen Kosten der Pandemie zu finanzieren. Die Änderungen der GST / HST-Regeln für E-Commerce-Transaktionen, die in fünf Jahren voraussichtlich rund 3 Milliarden US-Dollar einbringen, werden Teil davon sein, aber diese Änderungen sind seit einiger Zeit in Arbeit. Wir haben zwar nicht mehr Einblick als jeder andere, sehen jedoch zwei große Kategorien möglicher Maßnahmen zur Erhöhung der Einnahmen: die Ausrichtung auf wohlhabende Kanadier und die Besteuerung ausländischer multinationaler Unternehmen.
Die früheren Initiativen der Regierung zur Besteuerung der Reichen, einschließlich der jüngsten oben beschriebenen Änderungen der Aktienoptionen, haben zu anhaltenden Gerüchten geführt, dass die Regierung die bevorzugte steuerliche Behandlung von Kapitalgewinnen durch eine Erhöhung der derzeitigen Einschlussquote von 50% reduzieren könnte. Andere mögliche Änderungen, die in den Medien bekannt gemacht wurden, umfassen die Einführung eines Nachlasses oder einer Erbschaftssteuer auf große Nachfolgen. Da jedoch erwartet werden kann, dass die derzeitige liberale Minderheitsregierung später im Jahr 2021 eine Wahl auslöst, in der Hoffnung, von ihrer Pandemiemanagementleistung zu profitieren, ist es unwahrscheinlich, dass wesentliche einkommenssteigernde persönliche Steuermaßnahmen, die einen Teil der Wählerschaft verärgern würden, dies tun werden vorgeschlagen werden.
Ein wahrscheinlicherer Ansatz für diese Regierung ist die Einführung von Körperschaftsteuererhöhungen für ausländische multinationale Unternehmen. Kanada hat im Rahmen des OECD / G20-Rahmens für Grunderosion und Gewinnverlagerung (BEPS) gearbeitet, um bis Mitte 2021 einen koordinierten Ansatz für die steuerlichen Herausforderungen zu entwickeln, die sich aus der Digitalisierung ergeben. While the government has committed to a multilateral solution, it has expressed concern about the delay in arriving at a consensus. Accordingly, in the Fall Economic Statement the government proposed implementing a tax on corporations providing digital services, starting on January 1, 2022. The Fall Economic Statement did not provide details on the exact measures the federal government will pursue, but it appears to be considering a digital services tax (DST), similar to the one adopted by France, consistent with prior statements made by the governing Liberal Party as part of its re-election platform. On a provisional basis, the government estimates that the new measure would increase federal revenues by $3.4 billion over five years. Considering that this month France started raising its digital services tax and the United States announced it would not immediately retaliate (by imposing tariffs on French luxury goods), the way may be clear for a Canadian DST. Finally, Canadian-based multinationals will be keeping a close eye on the OECD-led discussions now taking place (noted in the accompanying bulletin on U.S. tax laws) regarding a potential “minimum tax” (under the so-called Pillar 2 mechanics) on foreign subsidiary profits and whether the views of those who oppose the notion gain traction.
What is highly likely is that in 2021 and beyond, the CRA will be under much increased pressure to bring in needed funds to service Canada’s public debt. In the Fall Economic Statement, the government promised to provide additional funding by committing an additional $606 million over five years to enable the CRA to target offshore tax compliance, commencing in 2021-22. The Fall Economic Statement also indicated that the government would be launching a consultation in early 2021 on potential amendments to Canada’s anti-avoidance rules, including the general anti-avoidance rule. All of this will likely result in more aggressive audits and more frequent assessments in cross-border situations.
Two high-profile tax cases will be heard and possibly decided by the SCC in 2021: Loblaw and Alta Energy. The narrow issues in Loblaw are only of historical relevance because the availability of the offshore bank structure at issue in that case has been substantially legislatively curtailed since 2015; however, the fundamental issues relating to the interpretation of the scope and purpose of Canada’s foreign affiliate and foreign accrual property income regime (equivalent to the U.S. Internal Revenue Code Subpart F provisions) could have far reaching consequences.
The SCC’s consideration of Alta Energy is also eagerly awaited. If upheld, both the SCC decision and the unanimous decision of the FCA in favour of the taxpayer may have dual significance: on the one hand, it may dampen the Canadian government’s confidence in the application of the general anti-avoidance rule to defeat treaty benefit claims it regards as abusive; and on the other hand, it should provide guidance on how the principal purpose test that is the centrepiece of the MLI should be applied to perceived treaty-shopping cases.
Michael N. Kandev and Paul Lamarre are partners at Davies Ward Phillips & Vineberg LLP (Davies) in Montreal and Toronto respectively. Reuben Abitbol, James Trougakos, Jesse A. Boretsky are associates in the Montreal office of Davies. Cadie Yiu is an associate in the Toronto office of Davies.
Download the related article, "Is a Green New (Tax) Deal Coming to Canada?" originally published in Tax Notes International, by Davies lawyers Gregg Benson, Michael Kandev and James Trougakos.