Category Archives: Offshore corporations

INTERNATIONAL TAX ASPECTS OF CANADIAN TAX PROPOSALS RE PRIVATE CORPORATIONS

On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies.

This was no surprise-the Minister had hinted at this some months ago at a tax conference.

In a nutshell, the Minister, and his many left-leaning compadres in the Liberal government, don’t like the fact that generally well-to-do taxpayers have been using creative tax planning to mitigate the effects of Canada’s generally high personal tax rates. Such planning helps to reduce the real personal tax rate, which in Ontario can be as high as 53.5% thanks again to Trudeau, to a somewhat less confiscatory level.

Much of this planning is tied into the use of private corporations.

That is not nice, they say, because the average Joe Blow cannot avail him or herself of such tricks because they don’t have a private corporation to use.

There are three types of planning that are the focus of this document:

Income Spitting-they really hate this, and are going to KO it mainly by extending the “kiddie tax” concept to folks of all ages. In addition, they are going to cut the tap, mercifully with some grandfathering for pre-2018 gains, on the multiplication of the “capital gains exemption” (“CGE”) within the family. Forget about giving any to those lazy kids! If you go through these mind-boggling provision, you are going to need either some Tylenol, or something stronger that goes in a glass. I predict it is going to be weeks before tax pros begin to fully appreciate the implications.

Capital gains strips-Under the current system, it is possible to extract corporate surplus at capital gain rates (or equivalent). There are two main approaches that can be used:

  • “Crystallizing” a capital gain within the corporation and utilizing the resulting “capital dividend account” (“CDA”) to make much of the distribution tax-free, and
  • “Bumping-up” the adjusted cost base (“ACB”) of shares sold between family members, and using that increased ACB to create a tax-free “pipeline” to remove surplus. As long as the selling shareholder did not use the CGE, section 84.1 of the Income Tax Act (“the Act”) did not apply to treat the payments as deemed dividends.

The document proposes to put an end to such fun and games. In case of the former, kiss the CDA goodbye; in the case of the latter, welcome to the new expanded section 84.1

Earning Passive Income on Corporate Tax DeferralPrivate corporations have billions of dollars in retained earnings that result from active business income taxed at relatively low corporate tax rates.

The humorless mandarins at Finance don’t like the fact that, what they view as largely deferred taxes, is earning passive investment income for the benefit of the company and its shareholders, and not them

They are not even sure about what to do about this, they just know that they don’t like it!

They have even resorted to looking at an approach that was added to the Act in 1972, I believe as Part V tax, to deal with “non-qualified investments”-that was repealed a few years later.

Believe me, they will do something, and it will not involve giving medals to corporation who benefit from such planning.

 

But I am not here to write about any of the above in great depth. What I am here to focus on are the international tax aspects of the proposals.

What international tax aspects? There is nothing about that in Bill Morneau’s document.

However, they are there, but under the surface, and neither he nor the Prime Minister would ever want to acknowledge it.

Namely, with proposals like those, which will substantially remove the ability of high-income Canadians to soften the tax rates they pay, many such taxpayers will head for the nearest exit and do whatever they can to become non-residents. Remember, unlike the situations with our brethren to the South, Canadian citizens can completely say “bye bye” to Canadian taxes by becoming nonresidents. Remember the line in the 1976 film Network, “I am mad as hell and I can’t take it anymore!”. I also submit that, with the world of the internet and the “cloud”, it is easier and more feasible for Canadians to follow that path, even if they maintain business interests in Canada.

Furthermore, if Finance does bad things to corporate surplus invested in passive assets, corporations may well be inclined to shift their business offshore, unless Finance closes that too!

But, you won’t catch me complaining about any of this! After all, I specialize in helping Canadians individuals become non-resident-I even wrote a book about it! I also help Canadian companies to shift business offshore. Thanks so much Bill and Justin!

CANADIANS WITH FOREIGN REAL ESTATE CORPORATIONS CAN FACE SURPRISING FAPI ISSUES

A Canadian resident who is a shareholder of a “controlled foreign affiliate” (“CFA”) will have special Canadian tax issues if that CFA earns “foreign accrual property income” (“FAPI”). Any corporation that is not resident in Canada (“Forco”) will be a CFA of a particular Canadian resident if it is controlled by that Canadian resident.  However,… Continue Reading

MORE HOGWASH ON OFFSHORE TAX AVOIDANCE FROM TORONTO STAR/CBC DUO-CANADA’S TIEAs GET A BUM RAP!

Most readers of the June 17, 2016 edition of the Toronto Star could not have failed to notice the headline of a prominently featured article: “Tax loopholes cost Canada billions in lost revenue” This was followed by the following subheading: “Canada used agreements meant to crack-down on tax evasion to open-up tax loopholes” What a… Continue Reading

FOR CANADIANS MAKING OFFSHORE VOLUNTARY DISCLOSURES, SLOPPINESS WITH CORPORATE RESIDENCY MAY BE A BLESSING!

With all the furor arising from the now infamous “Panama Papers”, more and more Canadians with undeclared offshore holdings will become very nervous about their situations. Whether they have been clients of Mossack Fonseca or not, the prospect of heightened levels of scrutiny and disclosure regarding offshore holdings is certainly a reality. It seems more… Continue Reading

FOREIGN CORPORATIONS THAT ARE RESIDENT IN CANADA-HOW ARE THEY TAXED?

As a general rule, any corporation formed in Canada is deemed to be resident in Canada for the purposes of the Income Tax Act (“the Act”)[1]. This is true even if the “central management and control” (“CMC”) of that corporation is located outside of Canada. But is the converse true? Certainly not! Unlike our neighbors… Continue Reading

SPECIAL CANADIAN TAX CONSIDERATIONS FOR IMMIGRANTS WITH WHOLLY-OWNED FOREIGN CORPORATIONS

      Wealthy immigrants to Canada will often have interests in a private foreign corporation (“Forco”). Certain related tax planning considerations have already been touched on elsewhere in the Canadian International Tax Blog-see the following two articles:    “How Wealthy Immigrants to Canada Can Use a Holding Company to Create a Tax-free Pipeline” “Special… Continue Reading

CANADIAN OFFSHORE CORPORATE TAX PLANNING FOR DUMMIES-PART 10

Canada Revenue Agency Reporting Requirements A Canco which controls a Forco will have an obligation to submit certain special returns to the Canada Revenue Agency annually. Failure to file such returns on a timely basis will expose Canco to significant penalties.   Form T1134   Any Canadian resident, whether a corporation or individual, with respect… Continue Reading

CANADIAN OFFSHORE CORPORATE TAX PLANNING FOR DUMMIES-PART 7

  Optimal Ownership Structures   So far, I have discussed the use of Forco within the context of a relatively simple structure where it would be a wholly-owned subsidiary of Canco. In many situations, that simple structure will be appropriate, but in others situations, there may be a better alternative. Two common variations are discussed… Continue Reading