But the Canadian government seems unlikely to make sweeping changes in the near future. While Canada’s Liberal government endorsed the OECD’s final recommendations at the G20’s November 2015 Summit in Turkey, the newly elected government is expected to evaluate the specifics in light of its policy objectives. Not surprisingly, Canadian government officials have informally indicated that they expect to adopt the country-by-country reporting recommendations. A formal announcement on these requirements is expected this year and perhaps as early as the upcoming federal budget in the spring of 2016.
The OECD Action Plan on BEPS clearly aligns with Canada’s longstanding goals to address base erosion in Canada. Well before the OECD’s current work began, Canada’s government saw a need to update its own international taxation principles. In 2008, the government appointed an international tax advisory panel of business and tax leaders to study the country’s international tax system. The panel’s final report set out a series of recommendations for tightening and improving the country’s tax rules.
Since then, Canada has adopted some of the panel’s recommendations by, among other things, tightening its thin capitalization rules, curbing foreign affiliat ‘debt dumping’ practices, and closing various loopholes in Canada’s international tax law. Implementation of other panel recommendations continues, but now these changes are being considered and positioned as in keeping with the OECD’s broader international project.
For example, in August 2013, Canada announced consultations on the possible adoption of an anti-treaty shopping measure. Canada has not yet finalized an approach to perceived treaty abuses, as the panel recommended. In its February 2014 federal budget, the Canadian government proposed a domestic general ‘main purpose’ treaty shopping rule, instead of a treaty-based approach that is being favored by the OECD. In the budget, the Canadian Department of Finance stated that a treaty-based approach would be time consuming to implement and less effective than a domestic rule.
The government also announced further consultations on the implementation of a domestic rule. After these and other consultations, the government announced that it would suspend the treaty shopping proposal’s implementation pending further work by the OECD and the G20 on its BEPS initiative.
Since the release of the OECD’s fina reports, the Canadian government has not clarified whether it will continue to pursue a domestic anti-treaty shopping rule. Rather, it is possible that Canada’s concerns may be resolved by adopting certain of the OECD’s recommendations, such as the multilateral instrument with other countries to address treaty-related BEPS issues.
The government has consulted with stakeholders on the OECD’s BEPS Action Plan and said in its 2015 federal budget that this input has helped shape Canada’s ongoing participation in the international discussions related to BEPS. In the budget, the government also highlighte its intention to proceed in this area in a manner that balances tax integrity and fairness with the competitiveness of Canada’s tax system.
At the same time, the Canadian government is cooperating with other tax authorities worldwide to address international tax evasion, reinforcing their tax treaties with new agreements on the exchange of taxpayer information. Canada has 22 tax information exchange agreements in force, with another one signed but not in force and seven under negotiation. Canada signed on to the OECD’s multilateral instrument on administrative exchange (e.g. information exchange).
Canada has also endorsed the OECD’s new common reporting standard for automatic information exchange. Under the new standard, foreign tax authorities would provide information to the Canadian tax authorities relating to financial accounts in their jurisdictions held by Canadian residents. On a reciprocal basis, the Canadian tax authorities will provide corresponding information to foreign tax authorities on accounts in Canada held by residents of their jurisdictions.
On the administration side, Canada’s tax authority has been staffing up on international tax auditors in recent years (although recent announcements suggest that the Canada Revenue Agency (CRA) is reducing its workforce). International audit activity has increased with particular attention being given to transfer pricing audits.
The CRA has identified aggressive tax planning (domestic and international) as one of the highest risks to its mandate to ensure taxpayers meet compliance obligations. The CRA has set up an Aggressive Tax Planning (ATP) program dedicated to identifying emerging tax avoidance issues, arrangements and products, and it handles cases requiring a remedy for tax avoidance. Canada has also imposed an ATP reporting regime that requires taxpayers to disclose certai ‘reportable transactions’ undertaken for tax avoidance purposes.
So what can international companies in Canada expect in terms of anti- BEPS related changes in the future? Sweeping change is unlikely, given the government’s longstanding focus on establishing a well-protected tax base while encouraging cross-border trade. In fact, in introducing its recommendations, the international tax panel prefaced its discussion with its predominant view that “Canada’s international tax system is a good one that has served Canada well.”1
Targeted changes are still likely, as Canada’s newly elected government considers adopting OECD recommendations that match its domestic tax policy goals, especially in the areas of treaty shopping, hybrid arrangements and transfer pricing. As noted, the Canadian government has informally indicated that it will adopt the OECD’s recommendations on country-by-country reporting. Canada also appears to be carefully considering the prospect of signing on to the multilateral instrument for addressing treaty-related BEPS issues.
1Advisory Panel on Canada’s System of International Taxation, Final Report — Enhancing Canada’s International Tax Advantage,(Ottawa: Department of Finance Canada, December 2008), at page 2.