Canada

Market overview

The past year has been a busy one for Canada's tax lawyers, who have been dealing with the consequences of the declining value of the Canadian dollar. Negative developments in the oil and gas sector have also had an impact on the tax and transfer pricing markets, and M&A and restructuring activity have seen an increase as some smaller companies have run out of money.

"Low commodity and oil prices have contributed to an uptick in cross-border M&A transactions," said Jon Northup, partner at Goodmans. "I think there are a lot of companies that are struggling. An M&A transaction becomes a way for them to get out of trouble," he added.

But professionals are positive that things quickly could turn for the better. "After more than 35 years working with businesses in the oil and gas sector, I have seen the economic roller coaster ride in terms of deal flow on a number of occasions. While the circumstances seem more complex each time, we remain cautiously optimistic about recovery in the sector," said Lindsay Holmes, national leader of Borden Ladner Gervais' tax group.

Transparency requirements are also on the increase in Canada, fuelled by the OECD's BEPS project. The country intends to implement Action 14 on dispute resolution mechanisms, Action 5 on countering harmful tax practices, Action 6 on preventing treaty abuse and Action 13 on country-by-country reporting (CbCR). Applying the TP provisions found in the BEPS Actions 8-10 is also being discussed, and Canada has endorsed the OECD's new standard for automatic exchange of information. Automatic exchange of information means that foreign financial entities would provide information on Canadian residents' financial accounts held in their jurisdictions to the Canadian tax authorities, and the other way around.

"The world is moving away from secrecy – bank secrecy, offshore account secrecy, tax planning secrecy – and towards transparency," said Jeffrey Trossman, head of tax at Blake, Cassels & Graydon. "The days of aggressive tax plans that create deductions in one country and corresponding income that disappears will soon be coming to an end. When everything's transparent, it affects the way you engage in international tax planning," he said.

Increased transparency has also caused the Canadian Revenue Authority (CRA) to spend a lot of money auditing companies. David Kemp, head of transfer pricing at Collins Barrow, said that the CRA is far more involved in cracking down on non-complying taxpayers, especially those with unreported income, than it was previously, and will also be targeting those who utilise tax havens or have been linked to the Panama Papers. "The CRA has been much involved in auditing both small and large corporations, and they have been very aggressive," Kemp said.


Tax authorities

International Tax Services Office
Canada Revenue Agency
Office address: 2204 Walkley Road, Ottawa ON, K1A 1A8
Mailing address: P.O. Box 9769, Station T, Ottawa, ON K1G 3Y4
Tel: +1 613 952 3741; +1 613 941 8495; +1 613 940 8497; +1 613 940 8499
Fax: +1 613 941 2505; +1 613 952 3845; +1 613 941 6905
Website: www.cra-arc.gc.ca


Tax rates at a glance

(As of April 2016)

Federal corporate income tax rate 15% (a)
Federal capital gains tax rate 7.5% (a)(b)
Branch tax rate 15% (a)
 
Withholding tax
Dividends 25% (c)
Interest 0/25% (d)
Royalties from patents, know-how, etc. 25% (c)
Branch remittance tax 25% (e)
 
Net operating losses (years)
Carryback 3
Carryforward 20

  1. These 2016 rates are applied to general income that is not eligible for the manufacturing and processing deduction or the small business deduction. Additional tax is levied by the provinces and territories of Canada, and the combined federal and provincial or territorial rates on general income may vary from approximately 25% to 31%.
  2. 50% of capital gains are subject to tax.
  3. Final tax applicable only to non-residents. This rate may be reduced by a tax treaty.
  4. In general, no withholding tax is imposed on interest paid to payees who are dealing at arm's length with the payer. However, withholding tax at a rate of 25% typically applies to interest paid or credited to related non-residents (the rate may be reduced by a tax treaty). Other specific exemptions or specific inclusions may apply to change the general rules noted above.
  5. This tax is imposed in addition to the regular corporate income tax. The rate may be reduced by a tax treaty.

Source: EY 2016 Worldwide Corporate Tax Guide


Firm contact details

Gowling WLG
Osler, Hoskin & Harcourt