Category Archives: Offshore investments

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. However, such corporation may be a FA even if as little as 1% is owned if related shareholders also own shares. The key measures are as follows:

 

Extended Reassessment Period-As a general rule, the CRA may not reassess the tax payable for a particular year if 3 years have passed since the date of original assessment (4 for corporations that are not CCPCs). There are certain situations where there is an “extended reassessment period”, which adds another 3 years. The Budget proposes to expand such situations to include those that relate to the income of a FA. This will apply to taxation years that begin on or after February 27, 2018. This would be particularly significant for taxpayers who hold an interest in a “Controlled Foreign Affiliate” (“CFA”) that is earning “Foreign Accrual Property Income” (“FAPI”).

 

T1134 Filing Deadline-Generally, taxpayers who have an interest in a FA must file a special information return with the CRA (form T1134) each year. This is in lieu of filing the more general information return with respect to foreign investment in connection with such holdings (T1135).

Historically, the deadline for filing this return has been 15 month after the taxation year of the reporting taxpayer. Presumably, this was in recognition of the fact that obtaining the required information might be rather time-consuming, particularly in the case of large multi-national corporations.

Notwithstanding such potential difficulties, the deadline will now be shortened to 6 months after the end of the year for taxation years beginning in 2020 and subsequent years.

 

Tracking Shares/Cell Companies-In the past, it was been possible to circumvent the FAPI rules by the use of “cell corporation” or other corporation using a “tracking share” structure. In effect, a Canadian resident would have an interest in a FA that would be tied into the results from a certain pool of corporate assets. Since the corporation would not be a CFA, there would be no need to report unremitted FAPI. Furthermore, when all of the activities of that FA were combined, its income might be considered “active business income”, rather than FAPI, so such income could be repatriated tax-free to a Canadian corporate shareholder.

The Budget contains measures aimed at preventing the use of such corporations to defer Canadian tax for taxation years starting on or after February 27, 2018.

 

CANADIAN T1135 REPORTING FOR PART YEAR RESIDENTS

As a general rule, Canadian residents need to file form T1135 with the CRA for any year in which the total “cost amount” of “specified foreign property” exceeds $100,000 at any time in that year[1]. Depending on the circumstances, this form requires various levels of information to be reported with respect to transactions in connection… Continue Reading

HOW CANADIAN COMPANIES CAN USE EXEMPT SURPLUS TO REDUCE TAXABLE GAINS ON SALE OF FOREIGN SUBSIDIARIES

Envision the following situation: Canco, a private corporate based in Ontario, has just gotten an offer to buy its wholly-owned U.S. subsidiary (“Usco”) for $10 million US. This is far more that the management of Canco thought it was really worth, so they jump at the offer. They ask Joe Numbers, their VP Finance to… Continue Reading

CANADA’S OFFSHORE TAX INFORMANT PROGRAM-THE CRA PROVIDES SOME UNIMPRESSIVE STATISTICS ON RESULTS

On January 15, 2014, the CRA launched the Offshore Tax Informant Program (OTIP). As described on CRA’s website, this program “offers financial rewards to individuals with specific and credible information about major cases of international tax non-compliance resulting in more than $100,000 of additional federal tax being assessed and collected.” In that connection, Question 14… Continue Reading

CRA CONFIRMS THAT PENALTIES FOR FAILURE TO FILE FOREIGN PROPERTY INFORMATION FORM CAN BE STATUTE BARRED

Under subsection 233.3(3) of the Income Tax Act (“the Act”), Canadian residents are generally required to file form T1135 for any year in which they have “specified foreign property” with a total cost base of more than $100,000 at any time in the year. This form is generally due at the same time that the taxpayer’s normal… Continue Reading

CANADIAN FOREIGN TAX CREDITS AND TAX TREATIES-MYTH VS. REALITY

CANADIAN FOREIGN TAX CREDITS AND TAX TREATIES-MYTH VS. REALITY Ever since I can remember, I have heard people reiterate what appears to be a common misconception regarding the ability of Canadians to claim a credit, for foreign taxes that they pay, against their Canadian tax liability. This myth seems to be widespread among accountants who… Continue Reading

FOREIGN ASSETS THAT DON’T REQUIRE T1135 REPORTING

In recent years, Canadian taxpayers and their accountants have been increasingly aware of issues relating to CRA form T1135, which is generally required where taxpayers hold “specified foreign property” (“SFP”) with a total cost base of more than $100,000 at any time in a year. This form and the related requirements have been the subject… Continue Reading

CANADIAN TAX IMPLICATIONS OF INVESTMENT IN OFFSHORE MUTUAL FUNDS  

  Many Canadian residents invest in mutual funds established outside of Canada. Often, the motivation for such investments has nothing to do with tax issues. Rather, in many cases, such funds offer better yields or more attractive asset mixes than domestic funds. In certain cases, such funds may not be directly distributed to Canadian residents,… Continue Reading