Final Report — Enhancing Canada's International Tax Advantage

128 Pages·2008·1.14 MB·English

F I N A L R E P O R T
Enhancing Canada’s
International Tax Advantage
Advisory Panel on Canada’s System
of International Taxation
December 2008

F I N A L R E P O R T
Enhancing Canada’s
International Tax Advantage
Advisory Panel on Canada’s System
of International Taxation
December 2008
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Cat. No.: F2-184/3-2008E
ISBN: 978-1-100-11281-7
Final Report — Enhancing Canada’s International Tax Advantage
December 2008
The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
House of Commons
Ottawa, Ontario
Dear Minister,
As members of the Advisory Panel on Canada’s System of International Taxation, we are pleased
to submit our final report and recommendations.
Over the past year, we have studied Canada’s international tax system and consulted with
Canadians on how it could be improved. We believe our recommendations will help guide
the development of a simpler, fairer, more efficient system that improves the competitiveness
of Canadian businesses internationally and attracts new foreign investment to Canada.
We would like to thank the many Canadians and others who engaged in this debate with
enthusiasm and insight, and we acknowledge the assistance and support of public servants
from the Department of Finance and the Canada Revenue Agency.
We thank you for the opportunity to contribute our views on enhancing Canada’s international
tax advantage.
Yours sincerely,
Peter C. Godsoe, oc Kevin J. Dancey, fca
Chair Vice Chair
James Barton Love, qc Finn Poschmann
Nick Pantaleo, fca Cathy Williams
Guy Saint-Pierre, cc
Advisory Panel on Canada’s System of International Taxation
Members of the Advisory Panel on Canada’s System of
International Taxation
• Peter C. Godsoe, oc, Chair
• Kevin J. Dancey, fca, Vice Chair
• James Barton Love, qc
• Nick Pantaleo, fca
• Finn Poschmann
• Guy Saint-Pierre, cc
• Cathy Williams
For biographical information about the Panel members, see Appendix D.
Acknowledgments
This report is the product of the collective efforts and commitment of all those who worked
with and assisted the Panel. The members of the Panel would like to acknowledge and thank
the following people:
Members of the Secretariat to the Panel
Brian Mustard, ca Executive Director
Heather Hemphill Policy Analyst
Christine R. Kennedy Policy Analyst
Timothy B. Kuss, ca Policy Analyst
David Messier Policy Analyst
Joseph Petrie Report Writer
France Marengère, cga Ad Hoc Subcommittee on Information Collection
Tina Santos Executive Assistant and Office Manager
Sylvie Comeau Administrative Assistant
Nazim Mufti Administrative Assistant
Manon Pigeon Administrative Assistant
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Final Report — Enhancing Canada’s International Tax Advantage
Members of the Transfer Pricing Subcommittee
Pierre Barsalou François Vincent
Jinyan Li Scott Wilkie
John Oatway, cga
The Panel thanks the organizations and people involved in coordinating our cross-country
consultation meetings and providing expert advice. We also thank representatives of the federal
government, who provided information and assistance, and the researchers, who provided
insight and analysis to support us in our work.
Note to reader
In writing this report, the Panel has aimed to use plain language to express our views on a
highly complex topic. Readers should be aware that the descriptions of international tax rules,
business structures and transactions in this report have been simplified. Unless otherwise
stated, statutory references in this report are to the Income Tax Act, rsc 1985, c. 1 (5th Supp.),
as amended (herein referred to as “the Act”).
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Final Report — Enhancing Canada’s International Tax Advantage
Table of Contents
1. Introduction ..............................................................................................................1
Our mandate ....................................................................................................................1
Our approach ...................................................................................................................2
2. Our Current Environment ...................................................................................4
Introduction ....................................................................................................................4
Tax policy and cross-border investment .........................................................................4
Benefits of foreign inbound and outbound direct investment to Canada .......................7
Looking forward ...........................................................................................................10
3. Principles for Guiding Canada’s International Tax Policy ...................11
Introduction ..................................................................................................................11
Competitive tax system for Canadians investing abroad ..............................................12
Level playing field for domestic business activity .........................................................16
Protecting the tax base ..................................................................................................17
Straightforward tax rules ..............................................................................................17
Open consultation .........................................................................................................17
Regular benchmarking ..................................................................................................18
Implementing the principles .........................................................................................18
Our recommendations ..................................................................................................19
4. Taxation of Outbound Direct Investment ...................................................20
Introduction ..................................................................................................................20
Canada’s current system ................................................................................................21
Assessing Canada’s treatment of foreign active business income .................................23
Foreign accrual property income and Canada’s anti-deferral regimes .........................34
Expenses incurred to earn foreign-source income .......................................................46
5. Taxation of Inbound Direct Investment ......................................................55
Introduction ..................................................................................................................55
Interest expense incurred by foreign-owned Canadian businesses ..............................55
Treaty shopping .............................................................................................................71
6. Non-Resident Withholding Taxes ..................................................................73
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Advisory Panel on Canada’s System of International Taxation
7. Administration, Compliance and Legislative Process ...........................78
Introduction ..................................................................................................................78
Enhancing mutual responsibility and cooperation .......................................................79
Resources for administering the international tax system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Transfer pricing administration ....................................................................................81
Waivers from withholding tax obligations under regulations 102 and 105 ..................87
Taxable Canadian property ...........................................................................................90
Legislative process ........................................................................................................92
Information management .............................................................................................94
8. Looking Ahead ........................................................................................................96
Introduction ..................................................................................................................96
Source-based taxation ...................................................................................................96
Neutrality among substitutable economic returns .......................................................97
Tax consolidation ..........................................................................................................99
Appendix A List of Recommendations ..................................................................100
Taxation of outbound direct investment .....................................................................100
Taxation of inbound direct investment .......................................................................101
Non-resident withholding taxes ..................................................................................101
Administration, compliance and legislative process ..................................................101
Appendix B Technical Issues for Further Study ................................................102
Taxation of outbound direct investment .....................................................................102
Certification for withholdings under regulations 102 and 105 ..................................107
Providing investment advisory services to non-residents ..........................................108
Appendix C Taxation of Foreign-source Income —
Revisiting the Other Alternatives ...................................................109
Accrual or Worldwide Basis of Taxation .....................................................................109
Credit Method .............................................................................................................110
Appendix D Biographical Notes ...............................................................................112
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