The “reportable transaction rules” in the Tax Act require prescribed information to be filed in respect of a series of transactions if one of the three following “hallmarks” is present: (i) the fees of the adviser or promoter are based or contingent upon a resulting tax benefit or attributed to the number of participants or those offered an opinion or advice; (ii) the adviser or promoter has “confidential protection” (i.e., participants have an obligation not to disclose the transaction to third parties, including tax authorities); and/or (iii) any person, adviser or promoter receives “contractual protection” (i.e., any direct or indirect form of insurance against the tax risk of the transaction). In addition, specific transactions may trigger reporting as “notifiable transactions” and certain corporations with assets of at least $50 million must report uncertain tax positions reflected in their audited financial statements. Penalties for non-disclosure can be significant and the limitation period for reassessment of taxes will not commence where there has been a failure to report.
The Tax Act contains a number of anti-avoidance rules applicable to “back-to-back” arrangements intended to reduce withholding tax on certain interest or royalty payments by interposing an intermediary between the Canadian payor and a non-resident that would be subject to withholding tax at a higher rate if the non- resident had received the payment directly. The 25% withholding rate may be reduced under an applicable tax treaty. For dividends, many of Canada’s tax treaties reduce the rate of withholding to 15%, except where the shareholder is a corporation that beneficially owns 10% or more of the voting shares of the dividend payer, in which case the rate is generally reduced to 5%. The typical treaty rate on royalties is 10%, which may be reduced to 0% on certain royalties. If any member of a partnership is a non-resident, the partnership is itself deemed to be a non-resident under the Tax Act. Consequently, a payment by a Canadian resident to a partnership with any non-resident members is subject to full withholding tax. However, in practice, the CRA may permit the payer to look through the partnership and withhold on the basis of a blended withholding tax rate reflecting the residence and treaty status of the members of the partnership. The Canada-U.S. tax treaty generally eliminates withholding tax for payments of interest to non-arm’s-length U.S. persons.
SPECIAL RULES FOR NON-RESIDENTS
Withholding Tax A resident (or deemed resident) of Canada that makes a payment to a non-resident in respect of most types of passive income (including dividends, rent and royalties) is generally required to withhold tax equal to 25% of the gross amount of the payment. Interest that is “participating debt interest” and interest paid or credited by a Canadian resident to a non-arm’s- length non-resident person is also subject to withholding tax. Conversely, interest that is neither “participating debt interest” nor subject to the “thin capitalization rules” is generally exempt from withholding tax when paid to an arm’s-length non-resident person. The Canada-U.S. tax treaty generally eliminates withholding tax for payments of interest to non-arm’s-length U.S. persons that are entitled to the benefits of such treaty.
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Doing Business in Canada
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