International Issues In Taxation Residence Taxation of non-residents on Canadian source income Double taxation issues Emigration and immigration

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

© 2009, 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.


Basic ties

Dwelling Spouse or

common-law partner Dependants


Other Considerations

Personal Property Social Ties Economic Ties Health Card, Driver’s

License Vehicle Registration Passport Canadian Unions Or

Professional Associations


Taxation basis

Worldwide income

Pro rata for year


Entering Canada

Usual immigration rules

Other factors may be considered


Departing Canada:Latest Of:

Departure Date Departure Of

Spouse And Dependants

Establishment Of New Residence


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.


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.


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.


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).


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.


Incorporated In Canada After April 26, 1965 Deemed Resident


Incorporated In Canada Before April 27, 1965 Deemed Resident If:

Was Resident At Any Time Carried On Business In Canada


Incorporated Outside Of Canada Mind And Management Of Company


Choices Management (Usual Determinate) Beneficiaries Assets


Employment In Canada

Carried On Business In Canada

Disposition Of Taxable Canadian Property


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


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


General Rules

Producing, growing, etc.

Soliciting orders

Disposing of certain types of property


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.


Importance

ITA 2(3) Gains On Dispositions

Taxed In Hands Of Non-Residents


Real Property Partnership and

trust if TCP is main value

Private Company Shares

Public Company Shares (>25%)


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.


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.


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


Interest Income

If Part XIII is applicable: U.S./Canada convention reduces

rate to 7% for 2008, 4 percent for 2009, and zero thereafter


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.


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)


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


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.


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


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


Dual Source

Individuals: treaty identifies which country has primary right

Corporations: Allowed to change jurisdiction through a process called continuation


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


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)


Deemed Disposition Immediately Prior To Arrival

Deemed Acquisition On Date Of Arrival


Deemed Disposition

General Rule Exceptions

Real Property Business Property Excluded Personal Property

RPPs RRSPs DPSPs Stock Options


ITA 128.1(4)(d) Election

Allows Disposition When Not Required


Problems

Consistency

Avoidance Through Treaties


Security For Tax

Tax Could Be Burdensome

Deemed Security On 1st $100,000

No Interest On Amounts Secured


Unwinding a disposition


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.

Unwinding A Disposition - At Departure

POD $340,000ACB 220,000Capital Gain $120,000


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


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


Problem For Individuals Holding Shares Acquired Through Options

ITA 7(1.6) – No Deemed Disposition For Purposes Of Determining Employment Income Inclusion (CCPCs)


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


Like the situation with non-resident earnings Canadian employment income

$10,000 rule

183 day rule


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


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


In general, Canadian residents are subject to tax on this income

Problems Dividends: source company has not paid Canadian

taxes

Compliance issues

Complexity issues


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


Non-resident entities


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


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


Foreign Affiliates

Taxpayer has an equity percentage of at least 1 percent

Taxpayer and related persons have at least 10 percent


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


Controlled Foreign Affiliates

Defined

Controlled by taxpayer

Other (see Paragraph 20-166)

Required to report foreign accrual property income (FAPI)


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


Foreign Affiliate Dividends

Requires surplus tracking

Exempt surplus

Taxable surplus

Pre-acquisition surplus


Foreign Affiliate Dividends – ordering rule

1st from exempt surplus

Next from taxable surplus

Residual from pre-acquisition surplus


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


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.


Proposed Tax

Based on designated cost of investment

Rate = prescribed rate, plus 2 percent

Very harsh


In general, subject to foreign tax credit procedures

See Chapters 10 and 11



Documents

International Issues In Taxation Residence Taxation of non-residents on Canadian source income Double taxation issues Emigration and immigration