Category Archives: Cross-border transactions

CANADIAN TAX ISSUES WITH CAPITAL DIVIDENDS AND NON-RESIDENT SHAREHOLDERS

Under the Income Tax Act (“the Act”) a “capital dividend” (“CD”)[1] paid by Canadian resident corporation is not included in the income of a recipient shareholder.

A CD is an actual or deemed dividend paid with respect to which a specified election in prescribed form[2] has been filed by the paying corporation.

A CD may be paid by a private corporation. However, if an amount paid exceeds its “capital dividend account” (“CDA”) on hand at the relevant time a penalty will apply[3].

In general terms, the CDA can consist of amounts derived from the following:

  • CD’s received from other corporations
  • Life insurance proceeds, and
  • The non-taxable portion of capital gains, in excess of the non-allowable portion of capital losses[4].

Elements : The highlighted elements in the Tentex Royal recipe are a bit new, so it really is ideal that they give a bit of clarification : Hygrophilia fortifies the arrival of nitric oxide that takes after as an aftereffect of it begins physical response. canadian viagra prices Bulimia is well cheap professional viagra known, and it is characterized by over eating binges and inflicting oneself to throw up. This may delay diagnosis and furthermore unica-web.com commander viagra the treatment of more serious underlying health conditions. This is approved by the medical council and this medicine is helpful to the ED sufferer and good alternatives to order cheap viagra purchased this do exist.
However, even though a CD may not be included in income of the recipient shareholder, if that shareholder is a non-resident of Canada, non-resident withholding tax under Part XIII will apply in the same way as if the dividend were a taxable dividend[5].

In fact, Part XIII tax can even apply to a CD received by a Canadian resident trust that is distributed to a non-resident beneficiary, even if not in the same year[6].

In situations where there are also Canadian resident shareholders of the relevant corporation, prudent tax planning would usually dictate that steps should be taken so that none of the CDA is paid to the non-residents. Doing so would generally be a total waste-better to use it for the benefit of the Canadian residents.

A CD must be paid to all of the shareholder of a particular class. However, if the residents and non-residents hold shares of a different class, the CDA can be used solely to pay dividends on the residents’ class; the non-residents can receive taxable dividends on their class.

If there is only one class, it should be possible to undertake a reorganization such that the Canadian residents hold shares of a different class than the non-residents. That way, the CDA can be used strictly for the benefit of the residents. Normally, this would be accomplished by obtaining Articles of Amendment to create another class of shares that has the same or substantially the same attributes as the existing class, and having either the Canadian residents or the non-residents exchange their existing shares for shares of the new class[7].

If the shares are “taxable Canadian property” in the hands of the non-resident, it may be preferable for the Canadian residents to implement the exchange, and allow the non-residents to retain their original shares. That way, there would be no need for any concern regarding certain notification requirements in section 116.

If the residents exchange their shares, thought must be given regarding the question of whether or not the anti-avoidance rule in subsection 83(2.1) can apply. In general terms, that provision can apply where shares are acquired for the purposes of receiving a CD. This provision is designed to prevent “trafficking” in CDAs in situations where the existing shareholders cannot effectively use them. Nevertheless, a literal reading of that provision could lead one to conclude that it might apply to a Canadian resident who exchanges his or her shares to receive a CD on the newly acquired shares in the type of situation discussed above. Where applicable, the CD will be treated as a taxable dividend.

However, in virtual all cases, the conclusion would be reached that subsection 83(2.1) would not apply in such situations for one or both of the following reasons:

  • Subsections 83(2.2) to 83(2.4) provide exclusions from the application of subsection 83(2.1) for most situations, other than those where the CDA relates to a period where the relevant corporation was controlled by non-residents, and
  • Statements issued by the CRA, suggest that it is their administrative policy that subsection 83(2.1) should not be applied where existing shareholders exchange their shares for another class. Or, to put it another way, it is the purpose of the acquisition of the original shares which should govern[8].

[1] Subsection 83(2) (all statutory references are to the Act).

[2] Form T2054

[3] Under Part III, subject to an ability to elect to treat the excessive amount as a taxable dividend.

[4] The CDA can also consist of tax-free components arising on the sale of “goodwill” or other “eligible capital property” before the taxation of gains on such property was merged into the capital gains regime after 2016.

[5] Paragraph 212(2)(b)

[6] Subparagraph 212(1)(c)(ii)

[7] This would be a tax-free exchange under either section 86 or 51.

[8] See paragraph 6 of IT-146R4 and CRA document 2000-0026615

LLC “CHECKING THE BOX” MAY HAVE PITFALL FOR CANADIANS!

An answer to Question 16 of the “CRA Roundtable”, that was part of the 20th Annual STEP Canada Conference held earlier this year, may lead taxpayers and their advisor to make dangerously uninformed decisions. The question and answer are reproduced below:   “Given recent changes to the tax system in the US, Canadian resident persons… Continue Reading

RECENT FEDERAL COURT OF APPEAL DECISION MAY HELP CANADIAN TRUSTS WITH FOREIGN BENEFICIARIES  

In a recent article that I posted on this Blog (https://taxca.com/blog-2018-5/) (“Canadian Trusts with Foreign Beneficiaries Face New Challenges”), I discussed certain surprising statements that were made by the CRA at the 2017 Canadian Tax Foundation Annual Conference. It seems that they are suddenly alarmed about steps that tax planners have long used to allow… Continue Reading

MOST OF CANADA’S TAX TREATIES WILL GET AN INSTANT REWRITE DUE TO MLI

On May 28, 2018, Canada’s Finance Minister tabled a Notice of Ways and Means Motion aimed at introducing legislation to enact the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. This convention is commonly known as the “Multilateral Instrument”, or “MLI”. The MLI was signed by Canada on… Continue Reading

LITTLE-KNOWN PROVISION IN TREATY CAN ENSURE THAT AMERICANS GET FOREIGN TAX CREDIT FOR CANADIAN TAXES

The ability to claim credits for foreign taxes (“foreign tax credits”) (“FTC”) is the most fundamental and common way of avoiding double tax in connection with cross-border transactions. Both Canada and the U.S. have well-developed, and often complex, provisions within their tax laws to provide such credits where appropriate. Contrary to what many people think,… Continue Reading

CANADIAN FOREIGN PROPERTY REPORTING REQUIREMENTS RELATING TO PARTNERSHIPS

As a general rule, Canadians are required to file form T1135 with the Canada Revenue Agency (“CRA”) for any particular year if they hold “specified foreign property” (“SFP”) having  a total cost base of more than $100,000 at any time in that year[1]. SFP would encompass most forms of foreign investment property. But what happens… Continue Reading

CANADIANS WITH FOREIGN AFFILIATES TARGET OF 2018 FEDERAL BUDGET

The Federal Budget that was released on February 27, 2018 contained proposals that will definitely make life more difficult for Canadians who have a “foreign affiliate” (“FA”). In general terms, a non-resident corporation will be a FA of a Canadian resident if that Canadian resident owns at least 10% of the shares of any class.… Continue Reading

TAX CONSIDERATIONS FOR NON-RESIDENTS USING CANADIAN LPs

In the past year, I have had a number of inquiries from non-residents looking to register a Limited Partnership (“LP”) in a Canadian province-generally Ontario. The motivation for doing that is to have an entity that they can use for banking or credit card processing purposes that benefits from the “clean” reputation of Canada. One… Continue Reading

JULY 18 TAX PROPOSALS WILL ENCOURAGE FOREIGN OWNERSHIP OF CANADIAN CORPORATIONS

On January 15 of this year, I published an article, as part of this Blog, entitled “Wealthy Immigrants to Canada Should Consider Foreign Ownership of Cancos” (see https://taxca.com/blog-2017-1/). The thrust of that article was that better tax treatment of dividends and capital gains might result if family members, who were resident outside of Canada, held shares… Continue Reading

CANADIANS SHOULD THINK TWICE BEFORE USING U.S. 1031 EXCHANGES

Just about everyone who deals with U.S. real estate investments hears about “1031 exchanges” at one time or another. For the few who have not, it is, essentially, a mechanism whereby a gain on the sale of real estate may be deferred for tax purposes by acquiring a new property. Canadians investing in U.S. real… Continue Reading