The international taxation measures from the 2013-2014 Federal Budget are summarized below:
International Tax Evasion and Aggressive Tax Avoidance
The Budget proposes a number of measures to strengthen the capacity of the CRA to combat international tax evasion and to address international aggressive tax avoidance. These additional tools will improve the CRA’s ability to protect the Government’s revenue base and are consistent with the Government’s commitment to tax fairness.
International Electronic Funds Transfers
The Budget proposes that the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 be amended to require that certain financial intermediaries report to the CRA international electronic funds transfers (EFTs) of $10,000 or more. This includes banks, credit unions, caisses populaires, trust and loan companies, money services businesses and casinos. As well, the international EFT reporting requirements will be the same as the current EFT reporting requirements imposed under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The EFT reports will be required to be made to the CRA no later than five working days after the day of the transfer and will require financial intermediaries to provide information on the person conducting the transaction, on the receiver of the funds, on the transaction itself and on the financial intermediaries facilitating the transaction.
Information Requirements Regarding Unnamed Persons
Currently, tax rules allow the CRA to require any person to provide information or documents for the purposes of tax administration or enforcement. However, the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 contain rules requiring the CRA to first obtain judicial authorization (i.e., a court order) before issuing a requirement to a third party to provide information for the purpose of verifying compliance by unnamed persons. The tax rules currently contemplate that the CRA will obtain this judicial authorization on an ex parte basis.
The Budget proposes to eliminate the ex parte aspect. Instead, the CRA will have to give notice to the third party when it initially seeks a court order from a judge of the Federal Court. As a result, the third party will be required to make any representations it chooses to make at the hearing of the application for the order, thus eliminating the need for a review for that purpose.
Stop International Tax Evasion Program
The CRA will launch the Stop International Tax Evasion Program under which it will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will enter into a contract that will pay an individual only if the information results in total additional assessments or reassessments exceeding $100,000 in federal tax. The contract will provide for payment of up to 15 per cent of the federal tax collected (i.e., not including penalties, interest and provincial taxes). Payments will be made only after the taxes have been collected. Awards will be paid only where the non-compliant activity involves foreign property or property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada.
To be eligible, individuals seeking rewards will have to meet program criteria. For example, individuals who have been convicted of the tax evasion about which they have information will not be eligible for a payment under the program. All reward payments will be subject to income tax.
Extended Reassessment Period: Form T1135
A Canadian-resident individual, corporation or trust that, at any time during a year, owns specified foreign property costing more in total than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. Specified foreign property generally includes most types of income-earning property held outside of Canada, other than personal property and property used in carrying on an active business. Form T1135 must also be filed by certain partnerships that hold specified foreign property. After a taxpayer files an income tax return, the CRA is required to perform an initial assessment of tax payable with all due dispatch. The CRA has a period of time after its initial assessment in which to audit and reassess the liability. The normal reassessment period for most taxpayers is three years.
The Budget proposes to extend the normal reassessment period for a taxation year of a taxpayer by three years if: the taxpayer has failed to report income from a specified foreign property on their annual income tax return; and
the Form T1135 was not filed on time by the taxpayer, or a specified foreign property was not identified, or was improperly identified, on the Form T1135.
Revised Form T1135
Form T1135 currently requires only general information regarding where specified foreign property is located and what income it generates. To improve the usefulness of Form T1135 to the CRA in determining whether taxpayers are correctly reporting foreign income, the CRA will revise Form T1135. The revised form will require taxpayers to provide more detailed information regarding each specified foreign property, including:
- the name of the specific foreign institution or other entity holding funds outside of Canada;
- the specific country to which the property relates; and
- the foreign income generated from the property.
The revised Form T1135 will be required to be used for the 2013 and subsequent taxation years.
Foreign Reporting Requirements: Form T1135
Some taxpayers have indicated that it is difficult to comply with their foreign reporting requirements because they find the instructions on filing Form T1135 to be unclear and Form T1135 cannot be filed electronically. To help taxpayers meet their filing obligations with respect to Form T1135, the CRA will make certain improvements to the Form T1135 filing process. Beginning with the 2013 taxation year the CRA will: remind taxpayers, on their Notices of Assessment, of the obligation to file Form T1135 if they have checked the “Yes” box on their income tax returns, indicating that they have specified foreign property in the taxation year with a total cost of more than $100,000; and the filing instructions on Form T1135 will be clarified.
The CRA is also in the process of developing a system that will allow Form T1135 to be filed electronically. The CRA will announce when electronic filing becomes available.
Thin Capitalization Rules
The Budget proposes to further improve the integrity and fairness of the thin capitalization rules by extending the scope of their application to: Canadian-resident trusts; and non-resident corporations and trusts that operate in Canada.
International Banking Centres
The Budget proposes to repeal the IBC rules. This measure will apply to taxation years that begin on or after Budget Day.
In certain circumstances, the benefits conferred under Canada’s tax treaties are effectively enjoyed by residents of third countries that are not a party to the particular tax treaty. Third country residents may, for example, create a company in the treaty country for purposes of channelling, through the company, income and gains sourced in Canada. Third country residents using intermediary entities in this fashion seek to access benefits granted under a tax treaty that would not otherwise be available.
The Budget announces the Government’s intention to consult on possible measures that would protect the integrity of Canada’s tax treaties while preserving a business tax environment that is conducive to foreign investment. A consultation paper will be publicly released to provide stakeholders with an opportunity to comment on possible measures.
See the related Supplementary Information and Notice of Ways and Means Motion (NWMM) for details of the 2013-2014 Federal Budget announced by the Federal Minister of Finance on March 21, 2013.
Tags: Article; Tax; William (Bill) H. Cooper