Like many other countries, Canada’s Income Tax Act (“the Act”) contains rules aimed at limiting the ability of foreign shareholders of a Canadian corporation (“Canco”) to reduce the taxable income of Canco by interest charges.
These rules, which are commonly called “thin capitalization” rules, are found in subsections 18(4) through 18(8) of the Act.
The main thrust of these rules is that, if the level of interest-bearing debts payable to certain related non-residents exceeds 1.5 times the shareholder equity, interest on the excess is not deductible in computing the income of Canco. (Over the years, the allowed ratio has gradually been reduced to the current level-the original multiplier was 3, then reduced to 2, and now 1.5).
The good thing about these rules are that they are clearly defined in the Act, unlike those in certain other countries.
In particular, under the rules, a portion of interest paid or payable in any taxation year on amounts owing to a “specified non-resident shareholder” (“SNRS”) of that corporation, or certain other persons with which an SNRS does not deal at arm’s length, will not be deductible in that year if the average of all amounts, each of which is the greatest amount of interest bearing debts payable by that corporation to such persons in a calendar month in that year, exceeds the maximum allowed.
The maximum amount is 1.5 times the “equity amount” for that year, The “equity amount” for a taxation year is total of the following amounts:
- the corporation’s retained earnings at the beginning of that year, except to the extent that such retained earnings include the retained earnings of any other corporation;
- the corporation’s average contributed surplus at the beginning of each month in the year, to the extent it was contributed by an SNRS; and
- the corporation’s average paid-up capital at the beginning of each month in the year excluding any paid-up capital applicable to shares owned by persons other than an SNRS.
Bile/pancreatic reflux can move this aggressive acid mixture up to the stomach causing gastritis, persistent heartburn, esophageal damage, etc. viagra professional Tadalafil has no effect Continued cialis tadalafil 20mg in the absence of stimulation. Kamagra increases this pharmacy store levitra on line energy and improves your sex drive. If it happens, seek prompt cialis 40 mg medical attention.
A non-resident person will be a SNRS if that person, alone or together with other persons with whom that person does not deal at arm’s length, owns shares of that company which represent at least 25% of the votes or fair market value of all outstanding shares. For this purpose, any options or other rights in favour of that person, or a person with which that person does not deal at arm’s length, to acquire shares in the corporation will be treated as having been exercised. In addition, any rights that such persons have to cause shares owned by other persons to be redeemed, acquired, or canceled shall also be treated as having been exercised.
Up until recent changes to these rules, the disallowed interest still retained its character as interest for the purposes of the Act. However, for taxation years of the paying corporations ending after March 28, 2012, such amounts are treated as dividends. This is particularly significant in relation to amounts paid to U.S. lenders, since it means that such payments will no longer be free of tax under Part XIII of the Act as a result of the exemption in Article XI(1) of the Canada-U.S. Tax Convention. Instead, such amounts would be subject to Part XIII at the treaty rate applicable to dividends[1]. This would either be 5% or 15%, depending on the relationship.
A major overhaul of the thin capitalization rules was implemented a few years ago. The changes generally apply to taxation years that commence after 2013. The key elements of these changes were:
- The reduction of the relevant multiplier from 2 to 1.5, as discussed above,
- The expansion of the application of these rules to debts payable by trusts, both resident and non-resident, and
- The introduction of specific statutory rules to delineate how the rules apply to non-resident corporations that earn certain income from Canadian sources.
[1] Under Article X(3), “dividends” for the purposes of the Convention includes amounts which are treated as dividends under the tax laws of the country in which the paying corporation is resident.
WANT TO GET PERSONALIZED ADVICE FROM MICHAEL ATLAS?
Michael I. Atlas, CPA,CA,TEP,CPA(ILL)
Michael Atlas is the author of this article, and can provide personalized advice to you on international tax issues for a very reasonable fee. Wheverever you are, you can get his advice!
Contact him now! For your convenience, his homepage is reproduced below.
Phone (Office): 416-860-9175
Mobile (After-hours): 416-949-7111
Email: matlas@TaxCA.com
michael.atlas3
CANADA-BASED INTERNATIONAL TAX CONSULTING FOR CLIENTS WORLDWIDE
100% Dedicated To Minimizing Worldwide Tax Liability
Do you have a challenging international tax problem involving Canada?
Michael Atlas is widely regarded as one of the leading international tax experts in Canada.
He advises clients worldwide via email, phone, or Skype. You would never have to travel to his Downtown Toronto office.
Michael Atlas’ practice is strictly devoted to high-level tax CONSULTING. He does NOT provide accounting or tax preparation services.
RELYING ON THIS GUY’S ADVICE CAN BE DANGEROUS!
Joseph Blow, CPA, Average Accountant
Contrary to what most people think, very few Canadian accountants are real tax experts. Regardless of whether they have a designation (like CA,CGA,CMA, or CPA) or not, the vast majority have only a general knowledge of tax law and practice. That is fine for preparing tax returns, or giving advice on basic routine issues. However, when it comes to complex, unusual matters, very few have what it takes to give proper advice. When it comes to international matters, even most accountants who specialize in tax don’t have the ability, and go to an expert like Michael Atlas.
IN LESS THAN 5 MINUTUES HE CAN USUALLY HELP!
Michael Atlas, CPA,CA,CPA (ILL), TEP
That’s right, in less than five minutes from the time that Michael Atlas gets your email message or phone call, he can typically suggest an approach to help with a high-level international tax problem!
Because of Michael Atlas’ unique creative abilities, 40+ years of wide-ranging experience, and encyclopedic knowledge of Canadian tax law, he is uniquely equipped for situations where FAST RESPONSE is demanded.
Why don’t you put him to the test-you have nothing to lose!
Phone (Office): 416-860-9175
Mobile (After-hours): 416-949-7111
Email: matlas@TaxCA.com
michael.atlas3
All information provided is TOTALLY CONFIDENTIAL.
YOU NEVER HAVE TO LEAVE YOUR OFFICE!
Wherever you are in the world, you can get complete advice from Michael Atlas without having to leave your home or office.
He has been providing complete advice to clients worldwide via email for over 25 years! Phone or Skype works fine too! However, if you happen to be in Toronto, and want to meet, no problem!
WANT TO REMAIN ANONOMOUS?-NO PROBLEM!
All information provided to Michael Atlas remains strictly confidential, as is consistent with the Rules of Professional Conduct of the Institute of Chartered Professional Accountants of Ontario.
However, even with that, some clients wish to remain anonomous. No problem! Michael Atlas can give advice to Mr. or Ms. “X”-he does not need to have a real name. He can just give advice based on hypothetical facts as presented to him.
ADVISING ON A WIDE-RANGE OF ISSUES
Michael Atlas provides FAST, imaginative and creative advice in connection with the following, as well as many, many more areas:
- Emigration from Canada-guidance on saying “goodbye” to Canadian taxes
- Immigration to Canada-planning to minimize exposure to Canadian taxes
- Returning Canadian expats-what to do about assets accumulated offshore
- Offshore trusts-when can you use them and when you cannot
- Offshore corporations-you can save a fortune in the right situation
- International business structures-proper planning is the key to saving taxes
- Using tax treaties-they can be your best friend!
- Planning foreign income-proper planning is the key!
- Tax disputes and objections– he has a great track record in beating the CRA!
Contact Michael Atlas now to get FAST advice on all of these areas and more!
THE ONE OF A KIND CANADIAN INTERNATIONAL TAX BLOG
Michael Atlas authors a unique Blog that is totally devoted to Canadian international tax issues. It is the only one of its kind in the world! It now has 108 original articles.
Thousands of readers access its pages every month.
You may read all the pages of the Canadian International Tax Blog through the Blog page of this site.
THE OUTSTANDING CANADIAN BOOK ON NON-RESIDENT TAX
Michael Atlas is widely known across Canada for being the author of the leading book Canadian Taxation of Non-Residents, which is published by Wolters Kluwer (formerly CCH Canadian Ltd). This highly popular book, which is now in its 5th Edition, has been regularly used as a reference by accountants and lawyers in all parts of Canada for over 20 years! (To learn more about, or order, this book, click here.)
He can advise on all issues relating to non-resident taxation, including how to become a non-resident; all the implications and requirements; dealing with Canadian source income; and what to do if a Canadian expat returns.
FAST ADVICE ON DOMESTIC TAX PLANNING TOO
Michael Atlas can also provide FAST advice on a wide-range of high-level domestic tax issues, including
- Estate planning
- Real estate
- General corporate and business tax issues
- Corporate reorganizations
CONTACT MICHAEL ATLAS NOW TO GET FAST ADVICE!
You should contact Michael Atlas now for a FAST evaluation of whether and how he can help you. There is no cost or obligation.
Phone (Office): 416-860-9175
Mobile (After-hours): 416-949-7111
Email: matlas@TaxCA.com
michael.atlas3
All information provided is TOTALLY CONFIDENTIAL.
