Canada Outlines Draft Measures to Implement BEPS

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing. 

By Peter Menyasz

June 29 — Canada's finance minister released proposed legislative changes to implement commitments to the OECD's anti-tax base erosion and profit shifting initiative, and other changes announced in the fiscal 2016-17 budget.

The draft amendments to the Income Tax Act would strengthen Canada's transfer pricing rules by adopting country-by-country reporting, effective for the 2015 taxation year, the Department of Finance said in a July 29 statement.

Measures to adopt BEPS commitments are part of a broad range of legislative and regulatory changes proposed to implement commitments in the Canadian government's budget for fiscal 2016-2017, introduced in the Canadian Parliament March 22 (24 Transfer Pricing Report 1478, 3/31/16).

The amendments would also incorporate penalties for failing to meet the OECD's common reporting standard, under which Canada is to make its first information exchanges in 2018 on financial accounts held in Canada by foreign residents.

The department noted that the proposals have been modified in some cases to take into account consultations since then, but didn't identify specific changes that have been made.

Other International Issues

Other international issues addressed in the draft amendments include:

  •   narrowing of the exception to the cross-border anti-surplus stripping rule to prevent unintended, tax-free cross-border distributions of capital to non-residents;
  •   extending the “back-to-back loan” rules to royalty arrangements.

Domestic Measures

Domestic tax integrity issues covered by the draft amendments would:

  •   prevent business owners from “multiplying” access to the C$500,000 ($380,000) small business deduction by creating complex partnership and corporate structures;
  •   ensure that investment income derived from an associated corporation's active business is ineligible for the small business deduction;
  •   ensure that associated corporations can't avoid the C$15 million ($11.4 million) limit on taxable capital;
  •   close loopholes that allow private corporations to use life insurance policies to distribute tax-free amounts that would otherwise be taxable;
  •   address so-called “debt-parking” transactions to protect the integrity of the system's foreign exchange computation rules;
  •   prevent asymmetrical recognition of gains and losses on derivatives; and
  •   prevent deferral of capital gains tax by investors in mutual fund corporations structured as “switch funds.”

The amendments would also expand tax support for clean energy production, including through enhanced capital cost allowance treatment of investments in electric vehicle charging stations and storage equipment for electricity from renewable sources.

The draft amendments to the Income Tax Act and the Income Tax Regulations are open to public comment through Sept. 27.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bna.com

To contact the editor on this story: Rita McWilliams at rmcwilliams@bna.com

For More Information

The draft proposals are at http://src.bna.com/hg5.

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