Tax & Accounting Blog

Canada’s 2018 Draft Federal Budget Includes BEPS Provisions

BEPS, Blog, Global Tax Planning, International Reporting & Compliance March 1, 2018

On February 27, 2018, Canada released its draft Federal Budget 2018, which was tabled in the House of Commons. The Budget contains numerous BEPS provisions, including reporting requirements on beneficial ownership of trusts, and specific rules for foreign affiliates.

Reporting Requirements of Beneficial Ownership of Trusts

To improve the collection of beneficial ownership information with respect to trusts, Budget 2018 proposes requiring that certain trusts provide additional information on an annual basis. See BEPS Action 12. The new reporting requirements will impose an obligation on certain trusts to file a T3 return. This information would be used to help the Canada Revenue Agency assess the tax liability for trusts and their beneficiaries.

The new reporting requirements will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return. In general, an express trust is created with the settlor’s express intent, usually made in writing. Where the new reporting requirements apply to a trust, the trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector).

These proposed new reporting requirements will apply to returns required to be filed for 2021 and subsequent tax years.

Budget 2018 proposes to introduce new penalties for failure to file a T3 return, including a required beneficial ownership schedule, where required. The penalty will be equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500. If failure to file the return was made knowingly, or due to gross negligence, an additional penalty will apply.

The new penalties will apply in respect of returns required to be filed for 2021 and subsequent tax years.

Foreign Affiliates

Investment Business

Certain income of a controlled foreign affiliate (i.e., income from property, from a business other than active business and from other specified sources) is taxable to the taxpayer in the year in which it is earned, whether or not distributed, with a deduction for taxes paid by the affiliate. This income is referred to as foreign accrual property income (FAPI). See BEPS Action 3.

Income from an investment business carried on by a taxpayer’s foreign affiliate is included in the foreign affiliate’s FAPI. An investment business does not include a business carried on by a foreign affiliate if certain conditions are satisfied. One of these conditions is that the affiliate employ more than five full-time employees (or the equivalent) in the active conduct of the business. This condition is sometimes referred to as the “six employees test.” Certain taxpayers whose foreign investment activities would not warrant more than five full-time employees have engaged in tax planning with other taxpayers in similar circumstances seeking to meet the six employees test. This planning involves grouping financial assets together in a common foreign affiliate.

Budget 2018 proposes to introduce a rule for the purposes of the investment business definition so that, where income attributable to specific activities carried out by a foreign affiliate accrues to the benefit of a specific taxpayer, those activities will be deemed to be a separate business carried on by the affiliate. Each separate business of the affiliate will need to satisfy each relevant condition in the investment business definition, including the six employees test, in order for the affiliate’s income from that business to be excluded from FAPI.

This measure will apply to tax years of a taxpayer’s foreign affiliate that begin on or after Budget Day.

Trading or Dealing in Indebtedness

Where the principal purpose of a business carried on by a taxpayer’s foreign affiliate is to derive income from trading or dealing in indebtedness, the income from that business is generally treated as FAPI of the affiliate. Similar rules apply to ensure that income from an investment business is generally included in a foreign affiliate’s FAPI. Both sets of rules contain exceptions in respect of certain regulated foreign financial institutions. A condition under the investment business rules requires a taxpayer to satisfy certain minimum capital requirements to qualify for the regulated foreign financial institutions exception.

Budget 2018 proposes to add a similar minimum capital requirement to the trading or dealing in indebtedness rules. See BEPS Action 4.

This measure will apply to tax years of a taxpayer’s foreign affiliate that begin on or after Budget Day.

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