Canada’s Focus on International Tax

Canada’s tax policy makers and tax administrators have nevertheless not been idle. The cycle of tax amendments and audit projects to respond to tax planning innovations by taxpayers and their advisors continues as it always has. The legislative and administrative focus on international tax issues is due as much to the evolution of the Canadian economy and globalization (i.e., a general increase in cross-border transactions and relationships for both individuals and businesses) as to specific revenue raising initiatives spurred by the recession. And, while there has been an uptick in government initiatives dealing with international tax in the past five years, this is properly seen as part of a trend that began in the late 1990’s. This article addresses some of the more significant elements of this recent international focus. The topics addressed include Tightening of Canada’s thin capitalization rule, Introduction of foreign affiliate dumping rules, Transfer pricing developments and cases, Anti-hybrid rules in the Canada – U.S. Income Tax Convention, Services permanent establishment rule in the Canada – U.S. Income Tax Convention, Treaty shopping tax litigation cases, Limitation on benefits article in the Canada – U.S. Income Tax Convention, Increases to the international tax audit capacity of the CRA, Increased reporting requirements for foreign property holdings and international transactions. The foregoing discussion of Canada’s focus on international tax in legislation, treaties, tax audits and tax litigation demonstrates the importance of international tax in the Canadian tax system. The legislative rules governing the international affairs of Canadian residents and the Canadian affairs of non-residents are growing more extensive and more complex. Canada’s double tax conventions are increasingly addressing treaty shopping in one way or another. Finally, CRA’s attention and pursuit of international tax issues in tax audits and tax litigation is on the rise.