CHAPTER 08 Tax Considerations
The CRA has special audit powers in transfer pricing matters and can require that a taxpayer produce contemporaneous documentation within 90 days of the CRA making a formal request. In recent years, the CRA has become more aggressive in its auditing of transfer pricing records. A Canadian corporation will be deemed to have paid a dividend to a non-arm’s-length non-resident (other than a controlled foreign affiliate), even where such non-resident is not a shareholder of the Canadian corporation, when an excessive transfer price has been paid, thereby decreasing the Canadian corporation’s assets and increasing the non-resident’s assets. However, a non-resident is allowed to repatriate the amount of the transfer pricing adjustment to avoid the withholding tax on the deemed dividend. On June 6, 2023, the Department of Finance released a consultation paper and draft legislative proposals to significantly “reform and modernize” Canada’s transfer pricing rules. If adopted, the draft legislative proposals would de-emphasize the contractual terms and require the subject transactions to be determined by reference to their economically relevant characteristics (i.e., the actual conduct of the participants, including the functions performed and risks taken). TAX INCENTIVES AND SPECIAL REGIMES The federal government and many provincial governments provide tax incentives for certain business activities in the form of tax credits, reduced tax rates and accelerated write-offs of qualifying expenditures. In addition, special tax regimes may apply to certain undertakings, notably, as discussed above, the exploration and development of resource properties. The applicable rules and eligibility criteria are complex and beyond the scope of this summary; however, some of the more common tax incentives available federally
and in Ontario and Québec are noted below. In addition, the Tax Act provides reduced tax rates and certain other benefits to corporations that meet the definition of “Canadian-controlled private corporation” (CCPC), essentially a private Canadian corporation that is not controlled directly or indirectly in any way by one or more public corporations or non-residents or any combination of them. Scientific Research and Experimental Development Incentives The Tax Act contains generous incentives for “scientific research and experimental development” (SR&ED). SR&ED means systematic investigation or research carried out in a field of science or technology that is basic or applied research or experimental development, including work with respect to engineering, design, operations research, mathematical analysis and testing. Some activities are explicitly excluded from SR&ED, such as marketing, quality control, social science research, mineral or oil and gas exploration or production, commercial production and routine data collection. SR&ED expenses incurred on income account generally include all expenses directly related to research and development, such as salaries, cost of materials consumed in SR&ED and overhead expenses directly related to SR&ED. A portion of payments to Canadian resident corporations or other entities, such as universities, for SR&ED conducted in Canada on behalf of the taxpayer can also generally be included in SR&ED expenditures. Certain SR&ED expenditures made outside Canada – namely, salaries and wages of Canadian-resident employees carrying on SR&ED outside Canada, in support of SR&ED carried on in Canada by the taxpayer – may also qualify.
85
Davies | dwpv.com
Powered by FlippingBook