CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
5.5 Formula-Based Income Attribution There is no mandatory formula to determine the income of a foreign-owned local affiliate selling goods or providing services in Canada. Transactions with the corporate group’s foreign entities should rely on the arm’s length principle of the transfer pricing rules. 5.6 Deductibility of Intra-Group Management and Administrative Charges Generally, a local affiliate’s expenses are non-deduct - ible, unless they are made or incurred for the pur - poses of earning income from a business or property. Therefore, local affiliate expenses that are made or incurred for the purposes of earning foreign business or property income would normally be deductible to reduce the taxpayer’s net income. 5.7 Restraints on Related-Party Borrowing Canada has a set of thin capitalisation rules that may apply where the lender to a Canadian corporation is a non-resident person who, alone or with other relat - ed persons, owns more than 25% of the Canadian corporation’s shares (by vote or value). The interest expense on the loan would otherwise be deductible to the Canadian corporation. These rules may also apply to trusts and to partnerships of which a Canadian- resident corporation is a member. The acceptable level of non-arm’s length interest- bearing debt allowed for the Canadian thin capitali - sation rules is a debt-to-equity ratio of 1.5:1. Interest deduction will be limited proportionally if a debtor’s outstanding debts to a “specified non-resident share - holder” exceed that ratio. Any non-deductible “excess” interest is treated as a dividend for withholding tax purposes and would trig - ger withholding tax at a rate of 25% (which may be reduced under certain tax treaties). Debt financing provided by a Canadian corporation to its non-resident shareholders or any other non-res- ident persons connected to the non-resident share - holders is generally deemed to be a dividend paid to the non-resident, and is subject to Canadian withhold - ing tax at a rate of 25% (which may be reduced under certain tax treaties).
listed on a designated stock exchange if more than 50% of the fair market value of the shares was derived from one or any combination of the following, at any time in the previous 60-month period: • real or immovable property located in Canada; • resource property located in Canada; • timber resource property located in Canada; or • options or interests in any of the above. In general, tax on the disposal of taxable Canadian property should not result in double taxation for a non- resident residing in a jurisdiction with which Canada has a tax treaty. 5.4 Tax Implications of Change of Control Change of control provisions will not trigger immedi - ate tax or duty charges. However, the following occurs when there is a change of control: • the taxation year of the corporation is deemed to end, and a new taxation year is deemed to begin; • the corporation cannot deduct non-capital loss carry-forwards unless it carries on the business that gave rise to the loss for a profit or with a reasonable expectation of profit, in which case the losses are deductible only against the corporation’s income from the same or a similar business; • the corporation’s net capital loss carry-forwards expire; • accrued capital losses cannot be carried forward; and • the carry-forward of ITCs is restricted following the change of control. The disposal of an indirect holding in a Canadian cor - poration higher up in the foreign group could trigger the change of control provisions because “indirect control” has to be considered, as well as “direct con - trol”. A decision of the Supreme Court of Canada (SCC) has also introduced the concept of “effective control”, which has been described by the SCC as including “forms of de jure and de facto control”.
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