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International Issues In Taxation
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Residence
Taxation of non-residents on Canadian source income
Double taxation issues
Emigration and immigration
Foreign source income earned by residents
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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.
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Basic ties
Dwelling Spouse or
common-law partner Dependants
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Other Considerations
Personal Property Social Ties Economic Ties Health Card, Driver’s
License Vehicle Registration Passport Canadian Unions Or
Professional Associations
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Taxation basis
Worldwide income
Pro rata for year
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Entering Canada
Usual immigration rules
Other factors may be considered
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Departing Canada:Latest Of:
Departure Date Departure Of
Spouse And Dependants
Establishment Of New Residence
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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.
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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.
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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.
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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 ($10,320 for 2009).
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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.
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Incorporated In Canada After April 26, 1965 Deemed Resident
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Incorporated In Canada Before April 27, 1965 Deemed Resident If:
Was Resident At Any Time Carried On Business In Canada
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Incorporated Outside Of Canada Mind And Management Of Company
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Choices Management (Usual Determinate) Beneficiaries Assets
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Employment In Canada
Carried On Business In Canada
Disposition Of Taxable Canadian Property
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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
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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
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General Rules
Producing, growing, etc.
Soliciting orders
Disposing of certain types of property
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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.
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Importance
ITA 2(3) Gains On Dispositions
Taxed In Hands Of Non-Residents
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Real Property Partnership and
trust if TCP is main value
Private Company Shares
Public Company Shares (>25%)
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U.S./Canada treaty limits to:
Canada real property
Property that is part of a permanent establishment
Investments whose value is primarily attributed to real property.
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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.
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Interest Income
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
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Interest Income
If Part XIII is applicable: U.S./Canada convention reduces
rate to 7% for 2008, 4 percent for 2009, and zero thereafter
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Royalties
In general, the Part XIII rate is 25 percent U.S. /Canada Convention
Reduces rate to 10 percent Reduces rate to nil for copyright and computer
software royalties.
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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)
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Dividends
In general, dividends are subject to Part XIII at 25 percent
U.S./Canada tax convention 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
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Retirement related benefits
In general, subject to Part XIII
Some exceptions
Can also elect to be taxed under Part I
U.S./Canada tax convention
Rate reduced to 15 percent for periodic payments
In general, OAS and CPP received by U.S. residents will only be taxed in the U.S.
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Dual Residence - Individuals
Generally resolved by “tie breaker” rules in tax conventions.
U.S./Canada convention looks at Permanent home Centre of vital interests Habitual abode Citizenship Competent authority procedures
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Dual Residence – Corporations
Incorporated in Canada after 1965, but with mind and management in U.S.
U.S/Canada tax convention views country of incorporation as determining
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Dual Source
Individuals: treaty identifies which country has primary right
Corporations: Allowed to change jurisdiction through a process called continuation
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Residence Vs. Citizenship
U.S taxes on citizenship while Canada taxes on residence
A U.S. citizen resident in Canada is subject to taxes in both countries
In this situation, Canadian resident gets a credit against U.S. taxes for Canadian taxes paid
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Residence Vs. Source
A resident of Canada may be subject to another country’s taxes on income sourced from that country.
Resolved through the use of foreign tax credits (see Chapters 10 and 11)
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Deemed Disposition Immediately Prior To Arrival
Deemed Acquisition On Date Of Arrival
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Deemed Disposition
General Rule Exceptions
Real Property Business Property Excluded Personal Property
RPPs RRSPs DPSPs Stock Options
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ITA 128.1(4)(d) Election
Allows Disposition When Not Required
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Problems
Consistency
Avoidance Through Treaties
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Security For Tax
Tax Could Be Burdensome
Deemed Security On 1st $100,000
No Interest On Amounts Secured
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Unwinding a disposition
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Maxine Howard leaves Canada on December 1, 2009. 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. In 2010 she returns to Canada. She still owns the shares and they have a FMV of $430,000.
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Unwinding A Disposition - At Departure
POD $340,000ACB 220,000Capital Gain $120,000
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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
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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
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Problem For Individuals Holding Shares Acquired Through Options
ITA 7(1.6) – No Deemed Disposition For Purposes Of Determining Employment Income Inclusion (CCPCs)
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1,000 shares – Option Price = $10 Exercise when market price = $12, defers
employment income inclusion Leaves Canada when market price = $15
Deemed POD $15,000Employment Income ( 2,000)ACB ( 10,000)Capital Gain $ 3,000
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Like the situation with non-resident earnings Canadian employment income
$10,000 rule
183 day rule
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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
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In general, the ITA rules apply without regard to the location of the property being sold
U.S./Canada convention gives the U.S. the right to tax gains on real property and property used in a permanent establishment
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In general, Canadian residents are subject to tax on this income
Problems Dividends: source company has not paid Canadian
taxes
Compliance issues
Complexity issues
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Foreign investment reporting requirements
Required when total > $100,000 Includes
Foreign bank accounts Shares of non-resident corporations Real property located outside of Canada
Excluded Business property Personal use property
Substantial penalties
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Non-resident entities
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Any type of organization (corporation, trust, or other) that is organized, continued, or governed under the laws of a country other than Canada
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Non-Resident Entities
Types
Foreign affiliates
Controlled foreign affiliates
Foreign investment entities
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Non-resident entities
Issues
Dividends are paid from income that has not been taxed in Canada – solved by not getting tax credit
Elimination of tax credit can result in double taxation
Income may not be taxed in Canada until it is distributed
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Foreign Affiliates
Taxpayer has an equity percentage of at least 1 percent
Taxpayer and related persons have at least 10 percent
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Foreign Affiliates
In general, only dividends from taxable Canadian corporations can be deducted under ITA 112(1)
ITA 113(1) provides an equivalent deduction for dividends from foreign affiliates
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Controlled Foreign Affiliates
Defined
Controlled by taxpayer
Other (see Paragraph 20-166)
Required to report foreign accrual property income (FAPI)
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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
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Foreign Affiliate Dividends
Requires surplus tracking
Exempt surplus
Taxable surplus
Pre-acquisition surplus
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Foreign Affiliate Dividends – ordering rule
1st from exempt surplus
Next from taxable surplus
Residual from pre-acquisition surplus
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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
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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.
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Proposed Tax
Based on designated cost of investment
Rate = prescribed rate, plus 2 percent
Very harsh
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In general, subject to foreign tax credit procedures
See Chapters 10 and 11
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