Canada

Market overview

In the 2016 federal budget the Department of Finance revealed that the Canada Revenue Agency is now applying the OECD's TP guidelines as revised pursuant to the BEPS initiative. This process will provide an improved interpretation of the arm's-length principle. However, it announced that the Canadian Revenue Agency (CRA) would not alter its administrative practices in relation to low-value-adding services and the treatment of cash boxes.

Michael Kandev, partner at Davies Ward Phillips & Vineberg stated, "In my view the government has taken the correct approach in this area". In GlaxoSmithKline (2015), the Canadian Supreme Court held that the OECD TP guidelines are just guidelines, and are not binding Canadian law. "The arm's-length standard has been legislated into Canada's tax law," said Kandev. "While the "OECD's guidelines are not part of Canadian tax law." Thus, adopting the OECD's approach to cash boxes and low-value-adding services would generate inconsistency in the legislative framework of Canada's TP rules.

Section 233.8 of Canada's Income Tax Act formally introduced the requirement for country-by-country reporting (CbCR). The provision further revised paragraph 162(10) (a) of the act, which provides administrative penalties for failure to comply with CbCR. The act provides that Canadian entities are required to file CbC reports if the multinational enterprise's (MNE) consolidated revenue is more than CAD1.1 billion ($880 million) the preceding year. "Although some of this information is already required as part of Canada's existing foreign reporting provisions, it means that MNEs have to rejig information they collect to meet the CbCR requirements," said Kandev. "While CbC reports can be viewed as an increased regulatory burden, MNEs have taken this as an opportunity to upgrade their controls and software. This has provided them with a better outlook on their operations", Kandev added.

Furthermore, the Canadian government has signed a new exchange arrangement with the US that will implement CbCR standards between the two jurisdictions. This agreement is significant given that the US has chosen not to be a party to the OECD's multilateral treaty. This arrangement nevertheless shows a commitment to the global objective of eradicating tax avoidance. Under this arrangement, Canada and the US will begin to exchange CbC reports for the fiscal years beginning on or after January 1 2016.

The Canada Revenue Agency also announced significant changes to its voluntary disclosures programme (VDP). These changes intend to make the VDP unavailable for MNEs in regards to TP issues, including TP penalties. "This is a significant shift in the operation of the VDP, which has historically been administered broadly and with few wholesale restrictions. These changes significantly restrict the ability of multinational enterprises to rectify past deficiencies without penalty," said Michael Friedman, head of tax and transfer pricing at McMillan.

On June 7 2017, Canada became a signatory to the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The intention of the MLI treaty is to ensure greater uniformity in international TP rules by transposing standards from the OECD BEPS Project into bilateral treaties. While the MLI will not sit as a standalone tax treaty, it will modify existing bilateral treaties in order to eliminate double non-taxation.

The treaty implements certain minimum standards relating to anti-treaty shopping rules and mutual agreement procedures. In doing so, it provides some flexibility with regards to how these minimum standards will be satisfied and the potential application of BEPS measures within the treaty that do not have a minimum standard. The Canadian government has expressed its intention to adopt a principal purpose test (PPT) into its covered tax agreements as an interim measure to prevent certain abusive treaty shopping arrangements. The MLI will be applicable depending on ratification into Canadian law. The Department of Finance has suggested that this treaty could come into force as early as January 1 2019.

"The Canadian transfer pricing landscape has changed significantly over the past year. MNEs are being subjected to increased audit scrutiny as the CRA has stepped up transfer pricing enforcement action," Friedman concluded.


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 July 2017)

Federal corporate income tax 15%
Capital gains 7.5%
Branch tax rates 15%/25%
 
Withholding tax
Dividends 25%
Interest 0/25%
Royalties from patents 25%
Branch remittance tax 25%

Source: Deloitte


Firm contact details

Osler, Hoskin & Harcourt