International Issues In Taxation
 Residence
 Taxation of non-residents on
Canadian source income
 Double taxation issues
 Emigration and immigration
 Foreign source income earned
by residents
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
The average Canadian
individual whose job, family,
dwelling place, and other
personal property are all in
Canada, would clearly be a
Canadian resident and, as a
result, he would be liable for
Canadian taxation on his
worldwide income.
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
Basic ties
 Dwelling
 Spouse or
common-law partner
 Dependants
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
Other Considerations







Personal Property
Social Ties
Economic Ties
Health Card, Driver’s License
Vehicle Registration
Passport
Canadian Unions Or
Professional Associations
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
Taxation basis
 Worldwide income
 Pro rata for year
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
Entering Canada
 Usual immigration rules
 Other factors may be considered
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
Departing Canada:
Latest Of:
 Departure Date
 Departure Of Spouse
And Dependants
 Establishment Of New
Residence
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1. Sojourners in Canada for 183 days or more.
2. Members, at any time during the year, of the
Canadian armed forces when stationed outside of
Canada.
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3. Ambassadors, ministers, high
commissioners, officers or
servants of Canada, as well as
agents general, officers, or
servants of a province, provided
they were Canadian residents
immediately prior to their
appointment.
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4. An individual performing services, at any
time in the year, in a country other than
Canada under a prescribed international
development assistance program of the
Government of Canada, provided they
were resident in Canada at any time in the
3 month period preceding the day on
which those services commenced.
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5. A child of a deemed
resident, provided they are
also a dependant whose
net income for the year
was less than the base for
the basic personal tax
credit ($10,382 for 2010).
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6. An individual who was at any time in the year,
under an agreement or a convention with one or
more other countries, entitled to an exemption
from an income tax otherwise payable in any of
those countries, because at that time the person
was related to, or a member of, the family of an
individual who was resident in Canada.
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 Incorporated In Canada After April 26, 1965
 Deemed Resident
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 Incorporated In Canada Before April 27, 1965
 Deemed Resident If:
 Was Resident At Any Time
 Carried On Business In Canada
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 Incorporated Outside Of Canada
 Mind And Management Of Company
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 Choices
 Management (Usual Determinate)
 Beneficiaries
 Assets
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
Employment In
Canada

Carried On Business
In Canada

Disposition Of
Taxable Canadian
Property
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
ITA 2(3) – Non-residents taxed on employment
income earned in Canada

ITA 115(2) – Deemed employment income
 Teachers who continue teaching after taking up residence in
another country
 Non-residents remunerated from a Canadian source
 Non-residents receiving signing bonuses for work to be
performed in Canada
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
U.S. /Canada Tax Convention
 $10,000 rule – no tax if less than $10,000
 183 day rule – no tax if less than 183 days and not deductible in
Canada
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
General Rules
 Producing, growing, etc.
 Soliciting orders
 Disposing of certain types of
property
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
U.S./Canada Tax Convention
 Income taxable if a permanent
establishment
 Excludes certain facilities
(e.g., storage facility)
 An agent who can conclude
contracts is viewed as permanent
establishment.
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
Importance
 ITA 2(3)
 Gains On Dispositions Taxed
In Hands
Of Non-Residents
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Real Property
Partnership and trust if
TCP is main value
 Private Company
Shares (>50%)
 Public Company Shares
(>25%)


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
U.S./Canada treaty limits to:
 Canada real property
 Property that is part of a permanent establishment
 Investments whose value is primarily attributed to real
property.
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
Non-residents earning Canadian source
employment income, business income, or
capital gains on taxable Canadian property are
taxed under Part I

Property income (interest, rents, royalties, and
dividends) are generally subject to tax under
Part XIII

General rate is 25 percent – However, usually
modified by tax conventions.
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
Interest Income - General
 Part XIII is applicable only to
 Interest on participating debt
 Interest paid to non-arm’s length nonresidents (unless exempt)
 Most arm’s length interest is exempt
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
Interest Income – to U.S. residents
 Part XIII no longer applicable
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
Royalties
 In general, the Part XIII rate is 25 percent
 U.S. /Canada Tax Treaty
 Reduces rate to 10 percent
 Reduces rate to nil for copyright and computer software
royalties.
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Rents


If in rental business – Part I applies

If not, Part XIII is assessed at 25%

Problem: Part XIII is a flat tax on gross
proceeds (no deductions)

Solution: For real property rentals,
non-resident can elect to be taxed
under Part I (can deduct expenses)
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
Dividends
 In general, dividends are subject to Part XIII at 25 percent
 U.S./Canada tax treaty
 Rate to 5 percent if U.S. recipient is a corporation and owns 10
percent or more of payor
 Rate to 15 percent for other dividends to U.S. recipients
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
Retirement related benefits
 In general, subject to Part XIII
 Some exceptions
 Can also elect to be taxed under Part I
 U.S./Canada tax treaty
 Rate reduced to 15 percent for periodic payments
 In general, OAS and CPP received by U.S. residents will only be
taxed in the U.S.
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
Dual Residence - Individuals
 Generally resolved by “tie breaker” rules in tax conventions.
 U.S./Canada tax treaty looks at





Permanent home
Centre of vital interests
Habitual abode
Citizenship
Competent authority procedures
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
Dual Residence – Corporations
 Incorporated in Canada after 1965, but with mind and
management in U.S.
 U.S/Canada tax treaty views country of incorporation as
determining
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
Dual Source
 Individuals: treaty identifies which country has primary right
 Corporations: Allowed to change jurisdiction through a process
called continuation
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
Residence Vs. Citizenship
 U.S taxes on citizenship while Canada taxes on residence
 A U.S. citizen resident in Canada is subject to taxes in both
countries
 In this situation, Canadian resident gets a credit against U.S.
taxes for Canadian taxes paid
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
Residence Vs. Source
 A resident of Canada may be subject to another country’s taxes
on income sourced from that country.
 Resolved through the use of foreign tax credits (see Chapters 11
and 12)
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
Deemed Disposition
Immediately Prior To
Arrival

Deemed Acquisition
On Date Of Arrival
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
Deemed Disposition
 General Rule
 Exceptions
 Real Property
 Business Property
 Excluded Personal Property
 RPPs
 RRSPs
 DPSPs
 Stock Options
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
ITA 128.1(4)(d) Election
 Allows Disposition When Not
Required
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
Problems
 Consistency
 Avoidance Through Treaties
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
Security For Tax
 Tax Could Be Burdensome
 Deemed Security On 1st $100,000
 No Interest On Amounts Secured
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Unwinding a disposition
Maxine Howard leaves Canada on December 1,
2010. At that time, she owns shares of a private
corporation with a FMV of $340,000 and an
ACB of $220,000. As a result of the deemed
disposition/reacquisition, she has a taxable
capital gain of $60,000 [(1/2)($340,000 $220,000). In 2011 she returns to Canada. She
still owns the shares and they have a FMV of
$430,000.
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Unwinding A Disposition - At Departure
POD
ACB
Capital Gain
$340,000
220,000
$120,000
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Unwinding A Disposition - On Return
Election Under ITA 128.1(6)




Reverses Deemed Disposition On Departure
Amended Return
No Disposition On Departure – No Reacquisition On Return
Taxable Canadian Property Only
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
60 Months Or Less In Last Ten
Years

No Deemed Disposition On
Property Owned Before Last
Becoming Resident

Still Applies To Property Acquired
As A Resident
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
Like the situation with non-resident earnings
Canadian employment income

$10,000 rule

183 day rule
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
Taxation based on presence of permanent
establishments

If permanent establishment in source country, income will be
taxed there

If no permanent establishment, income will be taxed in Canada
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
In general, the ITA rules apply without regard to
the location of the property being sold

U.S./Canada tax treaty gives the U.S. the right to
tax gains on real property and property used in a
permanent establishment
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
In general, Canadian residents are subject to tax on
foreign source investment income

Problems

Dividends: source company has not paid Canadian taxes

Compliance issues

Complexity issues
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
Foreign investment reporting requirements
 Required when total ACB > $100,000
 Includes
 Foreign bank accounts
 Shares of non-resident corporations
 Real property located outside of Canada
 Excluded
 Business property
 Personal use property
 Substantial penalties
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Non-resident entities
Any type of organization
(corporation, trust, or other) that is
organized, continued, or governed
under the laws of a country other
than Canada
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
Non-Resident Entities
 Types
 Foreign affiliates
 Controlled foreign affiliates
 Foreign investment entities
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Non-resident entities
 Issues
 Dividends are paid from income that has not been taxed in Canada –
solved by not getting tax credit
 Elimination of tax credit can result in double taxation
 Income may not be taxed in Canada until it is distributed
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
Foreign Affiliates
 Taxpayer has an equity percentage of at least 1 percent
 Taxpayer and related persons have at least 10 percent
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
Foreign Affiliates
 In general, only dividends from taxable Canadian
corporations can be deducted under ITA 112(1)
 ITA 113(1) provides an equivalent deduction for dividends
from foreign affiliates
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
Controlled Foreign Affiliates
 Defined
 Controlled by taxpayer
 Other (see Paragraph 20-156)
 Required to report foreign accrual property
income (FAPI)
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
Foreign Accrual Property Income (FAPI)
 Includes
 Property income of controlled foreign affiliate
 Capital gains of controlled foreign affiliate
 Becomes active business income if more than five full time
employees
 Income is taxed as it accrues
 Dividends paid from FAPI can be deducted to offset tax paid on
accrual
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
Foreign Affiliate Dividends
 Requires surplus tracking
 Exempt surplus
 Taxable surplus
 Pre-acquisition surplus
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
Foreign Affiliate Dividends – ordering rule
 1st from exempt surplus
 Next from taxable surplus
 Residual from pre-acquisition surplus
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
Foreign Affiliate Dividends – Deductible Amounts
 100 percent if from exempt surplus
 Limited amount from taxable surplus
 Amount based on foreign tax amounts withheld
 100 percent if from pre-acquisition surplus
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
Foreign Investment Entity: any non-resident
entity, unless
 It is a partnership;
 It is an exempt non-resident trust;
 Carrying value of investment property does not exceed onehalf of the carrying value of all property; or
 Its principal business is not an investment business.
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
Proposed Tax
 Based on designated cost of investment
 Rate = prescribed rate, plus 2 percent
 Very harsh
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
In general, subject to foreign tax credit procedures

See Chapters 11 and 12
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