CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
es, such as interest, dividends and royalties paid or credited to non-residents. Subject to limited statutory exemptions, the Cana - dian payer is required to withhold tax from the gross amount paid or credited to the non-resident payee, and to remit it to the tax authorities on its behalf. The withholding tax rate can often be reduced to 15%, 10% or even 0% under Canada’s tax treaties. How - ever, before withholding less than 25%, the Canadian payer will normally require a completed declaration of eligibility for benefits under a tax treaty (ie, Form NR301, NR302 for a partnership, or NR303 for a hybrid entity such as a US LLC). 4.2 Key Treaty Jurisdictions for Inbound Investment Canada currently has 93 tax treaties in force with for - eign countries, which mainly follow the OECD Model The OECD Multilateral Instrument (MLI) entered into force in Canada on 1 December 2019 and introduces a treaty anti‑abuse rule into most of Canada’s tax treaties, which will deny the benefits of the applica - ble treaty where one of the principal purposes of the arrangement or transaction is to obtain the benefits of the treaty. For example, if determination is made that one of the principal purposes for using a subsidi - ary in a particular treaty jurisdiction is to access the benefits of that treaty, then the benefits of that treaty are denied. The tax authorities’ position is that, in certain cir - cumstances, Canada’s General Anti-Avoidance Rule (GAAR) could be applied to transactions that are undertaken primarily to secure a tax benefit afforded by a tax treaty. 4.4 Transfer Pricing Issues for Inbound Investors Transactions regarding goods, services (ie, manage - ment) and intangibles (ie, patents, trade marks) with non-arm’s length non-residents are required to occur under arm’s length terms and conditions. Otherwise, adjustments will be made to ensure that the Canadian Tax Convention (subject to exceptions). 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices
payer’s transfer prices or cost allocations reflect arm’s length terms and conditions. Should the Canadian tax authorities adjust transfer pricing, penalties could apply if the taxpayer has not made reasonable efforts to determine and use arm’s length transfer prices. Prescribed documentation must be maintained, since a taxpayer who fails to do so will not be considered to have made “reasonable efforts” to determine and use arm’s length transfer prices. Multinational business groups with more than EUR750 million in annual consolidated revenues must file a country-by-country report containing various finan - cial and operational information. Country-by-country reporting requirements in Canada were added based on recommendations made as part of the OECD Base Erosion and Profit Shifting (BEPS) project. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Related-party limited risk distribution arrangements should reflect arm’s length terms and conditions in line with the transfer pricing principles outlined in 4.4 Transfer Pricing Issues for Inbound Investors . In addition, consideration should be given to Article 12 of the OECD MLI regarding the avoidance of per - manent establishment status through the use of an agent that is not independent. 4.6 Local Transfer Pricing Rules and OECD Standards Canadian transfer pricing rules are generally in line with the OECD principles. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures The Canada Revenue Agency (CRA) encourages tax - payers who are subject to double taxation to consider the Mutual Agreement Procedure (MAP) programme. In its 2024 MAP Programme Report, the CRA men - tions that: • the CRA had 200 negotiable MAP cases on 1 January 2024;
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